Reasons Low Interest Rates Spell Trouble For Investors
Real Estate Know-how
30 November 2016
Ongoing low interest rates can lend to risks of property investors over-capitalising & market inflation.
Within every property cycle, there’s always an X-factor of sorts. An unprecedented occurrence that tilts the supply/demand equation into all sorts of imbalance, creating sudden price surges and in some cases, significant value declines.
These events are, more often than not, quite spasmodic and fleeting in nature. They tend to sneak up, occur very quickly and often leave investors licking their wounds in the wake of the equivalent of an unexpected financial hurricane. Think GFC, for instance.
Often, while the event itself might seemingly happen in an instant, the ramifications are felt for much longer. Occasionally, though, an X-factor will linger and have a far more subtle impact, as is the case with our ongoing low interest rate environment.
Of course, this has been a very welcome X-factor for many, including homeowners trying to meet their monthly mortgage repayments, and those seeking to grow their own property-based future fund.
But the fact is, ongoing low interest rates can quickly become problematic. Not just for individuals at risk of over-capitalising, but also markets that may start to over-inflate as punters take advantage of ‘cheap housing credit’.
Here are three reasons why low interest rates can spell trouble if investors are not careful…
1. The ‘whatever’ syndrome
It’s easy to slip into a state of financial complacency when we’re experiencing good times. But a bumpier road could lie just ahead, waiting to take the unsuspecting and ill-prepared investor by surprise.
Avoid stepping too far out of your financial comfort zone, maintain strong cashflow buffers and ensure careful financial modelling.
Another common ‘whatever trap’ is failing to do your due diligence when undertaking the asset selection process. This often occurs when beginner investors react to news of heated markets and make knee-jerk decisions to leap in or get left behind.
It’s admittedly easy to feel a sense of urgency around buying property when there’s so much talk about cheap credit and housing booms. But you must always invest according to facts and figures.
2. Straying into the unknown
It can be tempting to divert from one’s carefully planned investment path when carrots like low interest rates and a booming property market are dangled in front of us.
Now more than ever, though, it's critical that investors stick with a viable investment strategy based on sound assessment of your future objectives and own unique set of circumstances.
The key is to have a solid foundation, but be adaptable enough to accommodate changing market conditions.
Ultimately, if you manage to stay true to the plans for your future fund, you’re less likely to fall victim to crafty market manipulators; those seeking to peddle their wares and make a fast buck.
You’ll also be less reactive to market hype and more likely to succeed at gathering a nice collection of carefully acquired assets in a sustainable, long-term investment structure. It really does pay to have a plan.
3. Digging in too deep
This occurs when property investors decide they can make their equity stretch further than it perhaps would if interest rates weren’t quite as favourable.
Right now, many investors can enjoy the benefits of what could essentially become a neutrally geared property portfolio, once negative gearing and other tax entitlements are claimed.
What an incredibly enticing prospect; particularly if it means the potential to split your equity between two investments instead of one by taking on more debt. It’s cheap after all!
The problem here is short-term thinking. The solution is forward number crunching that accounts for a future interest rate rise of at least 3 to 4 per cent when assessing your serviceability both today and tomorrow.
Just because you can afford the repayments right now, doesn’t necessarily mean it’s a sound investment decision. Crunch the numbers on any property you’re considering and make sure they stack up. This is especially important when buying in more competitive locations.
Would you like further professional insight into the prosperous management of your investment portfolio in today’s changing property markets? Click here now or call to connect with the Little Real Estate team.