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2022 has been full of significant events that have driven change in the personal and professional lives of most people. Of all the newsworthy items of late, perhaps none has felt more impactful on average Australian than interest rate rises.
They’ve been a cause for concern among many, but it isn’t all bad news. Here’s why we believe the fallout from rate rises both now and in the coming months will be less dramatic than some might suggest.
In May, the Reserve Bank of Australia (RBA) decided to raise rates by 0.25 percentage points, bringing the base figure to 0.35 per cent. The rise came on the back of a larger than anticipated inflation rate of 3.5 per cent.
The shift was described as significant for several reasons.
Firstly, it’s the first time we’ve seen an interest rate rise in over a decade.
Secondly, the 0.25 per cent increase was larger than many expected. Most economists were anticipating a 0.1 per cent shift, so seeing more than double the predicted figure caught a lot of people off guard. The increase also came just weeks out from the Federal election, which was provocative. The RBA traditionally leaves interest rates alone before elections to avoid influencing voters and political campaigns.
Finally – the RBA is telegraphing more increases to come in 2022. Economists for the bank are tipping the cash rate to reach 1.75 per cent by the end of this year, and 2.5 per cent by the end of 2023.
Interest rate moves are often a cause for concern for most Aussies. It’s a cumbersome lever pulled by the RBA to try and keep inflation within its target range of two to three per cent. It is effective for this purpose but increasing rates filters through to the whole economy – both to those sectors that need slowing, and those that don’t.
Here are Achieve Homes we’re confident that this rate rise is nothing to worry about for several reasons:
We forget that interest rate rises are a sign of a strengthening economy. Given the challenges we’ve tackled over the past two and a half years, increasing rates signal things are on the up. The current inflation figure isn’t surprising given we’ve come off a very low base after all the pandemic problems.
Rate rises have been expected for some months now. Between economists’ pronouncements in the media and mutterings from the RBA, the rate rise should surprise nobody.
As such, anyone who knew they’d be affected has already factored rate rises into their decision making.
Talk to anyone who had a loan back in 1989 when interest rates were at 17 per cent. They’ll tell you the current scenario is a dream.
Even if rates moved as high as the predicted and reach 2.5 by 2023, they would still be below three per cent. The last time we saw rates above that figure was in 2013.
Therefore, by historic standards, money remains very affordable.
The pandemic helped Aussies focus on their finances. A look at household balance sheets reveals that many of us have a war chest of funds, squirreled away in offset accounts or term deposits. We did this as a population to shore up our finances during the uncertainty of COVID. The fact remains most borrowers are now well placed to deal with a few percentage point increases in their mortgage, so property fire sales are incredibly unlikely.
We have one of the world’s most rigorous banking systems. There are multiple hoops borrowers must jump through to secure a loan. While many may have been cursing Australian Prudential Regulation Authority guidelines that introduced moves such as increasing the interest rate assessment buffer to three per cent, that’s now proving savvy. Anyone who’s qualified for a loan in the past few years will be well placed to weather rate increases because of the tough process they endured getting their finance in the first place.
To us, all these factors point in one direction – there is simply no need to panic. If you have your financials in order and a handle on your expenditure, things will be fine.
Interest rate rises of this level won’t destroy our property market. Our economy and the real estate sector are too robust to be undone by a couple of percentage point increases to a sub-three per cent cash rate.
In fact, after years of runaway property price growth, rising interest rates have delivered a window of opportunity to smart buyers. Confidence is down among the broader public, so there’s less competition when purchasing.
Of course, this window will close. Once Aussie homebuilders and buyers realise that rates aren’t knocking the wind out of real estate prices, growth will establish itself at long-term averages once more.
Firstly, be conservative with your numbers. It will put your mind at ease and might even allow you to take advantage of opportunities as they come to hand.
Secondly, be rigorous around your household budget. Track your income and expenses and look for ways to pay down your mortgage or park excess funds in an offset account. This delivers a buffer while also building a war chest for future purchases.
Third – keep things in perspective. Media beat ups about rising rates are just that. Even with rate rises, the figure remains at historically tiny levels.
Finally, work with your builder. Construction is a team effort between the client and their contractor. By discussing the challenges, we can come up with strategies to ensure you get what you want from a project without the stress that rate rises might deliver. It could be moves that lock in the price of materials, or a change in the structure of progress payments.
All these things can be discussed when you have a healthy communicative relationship with your building team.
If you’re ready to discuss your home build, get in touch with our team today.
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