Navigating High-Interest Markets and Its Impact on Property Investors
Executive Summary
This article uses both technical, data-driven information and anecdotal evidence to explain the true impact of high-interest rates on property prices and investment affordability. Historical data is used to show that there is little causality and correlation between interest rates and property prices. Anecdotal evidence is then presented to support the argument that despite high-interest rates, it is still an opportune time to invest in property.
Fears about an impending market crash and claims that the growth period is over are also addressed in this paper. This is supportive of the company’s position that there are still a lot of locations that are due for growth and are thus deserving of attention from property investors. Still, the paper recognises that scientific and data-driven strategies are necessary to find these locations and invest in them at the right time.
In sum, the paper aims to prove that high-interest markets are not impossible to navigate. Nevertheless, they can be challenging, especially for neophyte investors.
As such, the report concludes with a recommendation from the company on how property investors should best approach the high-interest environment.
What Happens to Property Investors When Interest Rates Rise?
There are two great myths surrounding property investing and interest rates:
- That rising interest rates cause house prices to drop
- That rising interest rates make property investing unaffordable
However, history has debunked both these myths.
Consider the illustration below in relation to the claim that prices drop when interest rates are high:
Fig. 1
As can be seen on the graph, interest rates rose by 14% to 17% from 1988 to 1999. Over the same period, however, house prices rose by more than 35%.
From 1990 to 1993, interest rates had an 8% free fall, going from 17% to 9%. Meanwhile, house prices practically went flat. This, despite the corollary claim that when interest rates go down, prices should effectively go up.
Finally, interest rates fluctuated wildly from 1994 to 1997—first rising by almost 2% before dropping nearly 4%. Through it all, house prices only continued to drift upward.
What these data points suggest is that interest rates and property prices follow individual trends that do not indicate any causation or correlation. As interest rates fluctuate, property prices remain fixed on their growth trajectory.
Now, let’s get a bit more technical by looking at the relationship between interest rates and median sales price growth (MSPG).
Fig. 2
What you’re looking at is a graph of the 12-month MSPG in both capital cities and regional areas of Australia (indicated by the grey lines), compared to the average fixed term mortgage interest rate (the red line) from 1993 to today.
Some important data points to consider:
- Between April 2001 and December 2003, interest rates rose from 6% to 7%. Yet, property markets grew by record amounts.
- Between December 2003 to July 2008, interest rates rose from 6.5% to 9%. Still, property markets continued their growth.
- Between March and October 2009, there was a 2% rate rise in just seven months. At the same time, growth skyrocketed.
Most interestingly, however, is what that black box at the bottom of the graph indicates. It shows all the times growth went negative. Notice how it only happened when interest rates were declining. While the rest of the time, markets were still growing.
All these trends point to one fact: that interest rates and property prices are unrelated.
This effectively debunks the first myth – that high-interest rates might be causing property prices to freefall soon.
Let’s now turn to the second myth.
Is Property Investing Still Affordable?
The assumption is that it becomes unaffordable to be a property investor when interest rates rise.
To a certain degree, interest rates do affect affordability, but only as far as new homeowners go.
Consider that someone who already owns a home is unlikely to be priced out of their ownership because they’re already being assessed at 3% higher than their repayments.
Where the squeeze happens is when new entrants try to penetrate the market. That’s where it gets a bit more challenging. After all, higher interest rates also mean buffer rates and community assessment rates go up, making it harder for new homeowners to get into the market.
That’s why in most cases, when interest rates go up, rents likewise go up. New homeowner affordability increases demand for rentals, driving prices up.
However, when interest rates go down, most of the time, the rent stays the same. And at times, rents even continue to go up, albeit at a slower rate.
This is good news for property investors, but the question is…
Why?
Well, that is because of the rental crisis in Australia.
There just aren’t enough houses for people who want to buy them. Thus, even if interest rates go down and homeowner affordability goes up, all it does is push the supply of rentals down, once again pushing prices up.
As a result, most rents across the country have been growing by 10% to 20% annually.
Still, not all locations are created equal. This means the issue of affordability may only be answered on a case-to-case basis. After all, affordability is inherently tied to profitability. And profitability relies on investing in the right property at the right place at the right time.
This is not an easy metric to gauge, which is why Dashdot designed an Investor Affordability Ratio.
We use this custom ratio to identify locations that are still affordable for property investors. And we do this by looking at the ratio of monthly asking rent to the monthly rent divided by the average monthly mortgage repayment in that area.
To illustrate, consider the two graphs below.
Fig. 3
What you see above is the investor affordability ratio in North Bondi. It’s all in the red, which means it’s now a very unaffordable suburb. Investors who buy properties in the area are thus buying at a negative profitability position.
Even if rents rise in North Bondi, property investors in the area would have a long way to go before they can dig themselves out of the red.
Fig. 4
In comparison, illustrated above is an undisclosed location we’ve discovered for our clients. Using the investor affordability ratio, we were able to direct our clients to this location where they are able to buy properties that are profitable from day one.
After locking in their prices on day one, investors in this area get to enjoy rents rising by 10% to 20% a year, meaning they’re going from strength to strength. As opposed to North Bondi, this location is now stable in the green, having experienced over 19.7% growth in the last 12 months.
This is a perfect illustration that across-board affordability is not defined by interest rates. Again, the issue can only be solved by looking at the nuances of each location and using the investor affordability ratio to determine whether or not a certain location is still affordable and profitable.
Bottomline: property investing can still be affordable. In fact, investors can start with just about $50K to $60K capital.
Take the case of Toni and Rosie, for instance.
To be fair, Toni and Rosie did leverage equity from another property. But that doesn’t change the fact that they started investing with just $60,000 cash at hand.
Summarised in the image above are the investments they were able to secure with the capital they had. As you can see, the couple’s first investment delivered a 219.2% ROI in just under two years. The second property gave them 51.5% ROI, and the third one, 156.4%.
What these numbers don’t reflect, however, is the massive change that property investing has brought to Toni and Rosie’s lives. Apart from improving their financial position, property investing has likewise shifted their emotional position to positive.
They have since moved to Surfers’ Paradise to live near the beach. They’ve had their first child. And through these life-changing decisions, Toni and Rosie still feel safe and secure, all because their property portfolio set them up for long-term success in a massive way.
Toni and Rosie’s story is just one of many, many case studies proving that property investing can still be affordable, so long as the investor is equipped with the right tools and know-how to navigate all types of markets, especially high-interest environments.
Is the Market Due for a Crash?
With the issue of high-interest rates and its (non)-impact on property prices and investor affordability all settled, let’s move on to yet another controversial topic:
The supposed impending crash of Australia’s property market.
News of an impending crash has been around for quite a while now. It has made tons of interested property investors fearful to make a move, while others are convinced about a looming fire sale where heaps of people would be selling their homes for lower prices. However, this is not a strategy that Dashdot agrees with—for the simple reason that we don’t believe a crash will happen any time in the foreseeable future.
We have three reasons for thinking this way:
- Borrowing is pressure-tested.
Everyone’s ability to borrow on a property located in Australia is pressure-tested at 2%-3% higher than what the actual interest rate is.
Take, for instance, the alarmist view that interest rates will go up at 2.5%. On the off chance that these projections come to fruition, a fire sale just wouldn’t follow suit. It’s unlikely that people will suddenly go underwater in repayments because they’re pressure-tested against such rates anyway.
Additionally, we don’t see people compromising on a need as basic as housing. Repayments would still be on top of their priority lists, which means a fire sale is very unlikely to happen.
- Real estate does not behave the same way as the financial market.
With both the share market crashed in, many people have come to the conclusion that it’s only a matter of time before the real estate market follows suit. However, this couldn’t be farther from the truth.
The main reason businesses may have become unprofitable and unattractive to investors is inflation. The increasing prices of goods and services are pushing up the cost of operating a business, thus squeezing the profit margins of investors. This is why the share market is performing poorly.
On the other hand, inflation is a godsend for residential property values because there’s a finite supply but high demand for property. This is exactly why real estate investing has long been considered a hedge against inflation.
Overall, the real estate market and the financial market have fundamentally different drivers. Thus, trying to predict the future of the property market based on what has been happening in the share market is akin to predicting the price of apples by analysing oranges.
- Past performance does not indicate future performance.
Anyone who projects a property market crash is looking to the past to try and tell what’s going to happen in the future. Our view is that this is a fool’s errand, considering that past performance does not indicate future performance when it comes to property.
In the 1980s, for instance, people were already saying the same things: that house prices can’t keep going up. And that people can’t afford to keep paying them, so property prices won’t keep doubling.
But here we are.
In the end, the key thing to examine is not whether a crash is looming. Instead, it’s whether or not there is still growth to be enjoyed for players who are not yet in the market. Or even those who have yet to get sufficient returns from their investment.
Is the Growth Period Over?
Since there are 58,264 towns and suburbs in Australia, it means one thing:
There will always be areas that are growing and areas that are slowing.
At first, Aaron and Kira did not believe this. Like many property investors who weren’t able to get an early start on real estate, they thought the growth period was over.
Luckily, they took the leap of faith and made their first investment just three months prior to writing time. And since then, their property’s value has already grown by 15.2%. Taking a look at the summary of their investment above, you’d see that it translated to a 61.5% return on invested capital and a gross yield of 6.8% in just three months.
If the growth period was indeed over, as they were led to believe, this kind of growth could not have happened. Aaron and Kira wouldn’t be out there right now, killing it in the real estate market.
Yet, they are. The couple is loving the way their whole life changed in less than a year since they started investing in Dashdot. Fortunately, they listened when I tried to change the way they looked at property investing and what possible growth they could still have in the future.
While the growth period may still be going on, technically, the national boom has ended.
The truth is that there was a bigger boom that happened in the property market, during which a lot of areas grew. Then, Australia had a national property price fall in September 2020. And since May 2021, the national median growth rate has slowed, which means the peak has passed and has started to slow down.
Nevertheless, there are places where growth is still on the rise, as evidenced by Aaron and Kira’s story. As mentioned earlier, it’s simply a matter of buying at the right place at the right time.
Case in point:
Fig. 5
Summed up above is an example of an investment we made AFTER the boom has ended. Note how the market is still on the rise, but we managed to buy at a strategic time— as the area was just coming out of a trough.
We bought the property for $400,000. And after two and a half months, it’s already shot up 7.6%, giving us a 59.7% return on invested capital.
While the boom has ended, look at what’s happening to our investment: the growth is still continuing. That’s because the growth is based on solid science and fundamentals.
The philosophy applied here is that investors should pick locations not based on what’s happening at the moment, but on where we project growth to be in the future. And we at Dashdot pride ourselves on entering markets before they start growing – whether that’s before, during, or after the so-called national boom has ended.
Conclusion: It’s Still a Good Time to Invest in Property, But Challenges Up Ahead
In reality, it’s getting challenging to find a property market that hasn’t had some growth from the boom that ended in 2021. After all, a staggering 90% of locations in Australia grew during this boom.
Still, we are of the opinion that just because a location has had growth doesn’t mean it’s all downhill from there. We firmly stand pat on our opinion that it is STILL a good time to invest in property.
In fact, a lot of places that we’re buying right now have already seen some growth. We are confident about our prospects since we’re buying into locations that meet our holy trinity of strong fundamentals: lifestyle, jobs, and affordability.
At Dashdot, we look at areas that have got a sustained opportunity pipeline, either through infrastructure developments, job-generating projects, and any other reason that could drive demand and growth to an area over a multi-year period.
Still, we have to admit that tough challenges are up ahead. The window of opportunity for experiencing life-changing growth in Australian real estate may still be wide open now, but it won’t stay like that forever.
Therefore, there is no time to waste for those who still wish to invest and earn big in property. There are still hundreds of locations out there waiting to be discovered before they finally join the fray of fully-grown-out areas.
It just bears reminding that for the property investors who are interested in searching and scaling those locations, it will take more than random lucky guesses and crossed fingers.
With the existing and future challenges to the property market, it will be a tough job to keep on finding these areas that are still up for long-term growth. This is why we’ve invested heavily into the science of what we’re doing.
After several thousands of hours of developing our location assessment tools like the investor affordability ratio we showed earlier, we can safely say that anyone can get lucky and experience growth. But it takes an incredible amount of expertise to do it to grow a prolific property portfolio.
All the different tactics generously shared by people who got it right once or twice pales in comparison to picking the right property in the right place at the right time. If more investors did their due diligence effectively and consistently, they truly won’t need to do much else to experience success in the real estate market.
As for us here at Dashdot, that’s the exact plan we’ll keep on doing:
to find the right properties in the right place at the right time.
To that end, we will continue on our growth path, starting with identifying great property management partners. This is because we recognise our vested interest in getting really good advice that we can pass on to our clients. So, we’re constantly on the lookout for property management partners who can efficiently manage our clients’ properties.
We will continue investing in on-ground partners who do top-notch pre-purchase inspections for us.
We will continue delivering a great service to our clients through our own scientific efforts and through the great symbiotic relationships we’ve established with our partners on the ground.
And most importantly, we will continue positioning ourselves and our clients in strong locations where they can invest with as little as $50K and still gain life-changing returns on their invested capital, despite the high-interest-rate environments we have to navigate at the moment.