What interest rate rises mean for the everyday investor

As a DIY investor, you’re probably wondering what will be the REAL impact of the latest interest hikes.

Where is the market going? What should you expect?

That’s what I tackle in today’s video (As per usual, the text version is available right below it!)

Enjoy!

I remember back in the late ’90s, my mentors would just say to me:

“Interest rates are pretty simple. When they go up, the market goes down.
When the interest rates go down, the market goes up.

–My early days mentors

For the last 11 years, the market has gone up so much because interest rates have been the lowest for over a decade.

Interest rates have been down for a long time. You know, they can’t go any lower than that.

But here’s the thing…

Everything is cyclical.

The market goes up…
… the market goes down.

Interest rates go up…
… interest rates go down.

Look at the Federal Reserve, i.e. the American central bank. They’re raised interest rates for the first time for a long time this year as well. And are on to the second interest rate rise as well.

Realistically, the way that the market has been going up… 20% to 30%… maybe even 40%, in certain areas over the last 12 and 24 months… it’s just completely unsustainable.

People have essentially been buying property with free money.

Why do I call it free money? If you’re getting a $1 million loan, and the interest rate is 2%. You’re paying $20k a year on interest there.

That’s what, $400 a week, right? $400 a week.

Now you go out and try to rent something for $400 bucks a week. Guess what?

It’s definitely not going to be worth a million dollars!!!

Probably be a two bedroom townhouse out in the burbs somewhere.

If. You’re. Lucky!

When will prices go down?

Look, what I’ve been reading indicates that we will get a total of 1% interest rate rise this year.

Plus another 1% next year.

Which means you’ll need to adjust your strategy.

  1. Finance will be harder to get.
  2. Investors will be more conservative.
  3. Sellers at this point in time are still very gung ho.

Yup, that’s true. Seller expectations are still very high.

It takes a good 6 to 12 months for sellers’ expectations to adjust. And that’s a good thing.

Properties are slow to go up, and slow to go down. (Which gives you more time in all types of market – from boom to bust – to adjust and exit with profits!)

When the market does go up, it’s takes time before people realise that “oh, you know what? I thought my house is worth $600 grand, it’s actually worth $800 grand!”

If you can get in early on and buy it off them for $650,000, and you know it’s actually worth $800k, that’s where the opportunities are in a rising market!

And I’ve done that multiple times.

On the other hand, when the market’s going down…

It’s The Return Of Motivated Sellers!!!

if something is worth $800k as of today, in six months time, it may only be worth $650k to $700k. And people won’t realize that because it takes time for data to hit the market and it takes time for people to feel the pinch.

So you know, motivated sellers will come more and more into occurrence in the next 12 to 18 months to 24 months.

So with this current change in the marketplace, the opportunities will be there more so than before. BUT!

… you just have to be patient.

Because we’ve had just one interest rate rise. It’s the start of the market change. But if you look back to the GFC, but there were probably half a dozen to a dozen interest rate rises before the market, really, really turned.

So here, I’m hoping we’ll go for a soft landing.
But it does happen to have to happen to curve this inflation rate.

International Indicators You Should Be Watching

Firstly, I look into overseas.

I find that the US market is really a good indicator of where Australia is going to go. As the saying goes, when the US sneezes, Australia catches a cold.

So there’s two initial fundamental indicators that I look for in the American market. And you don’t have to be a super stock trader or anything to look at these things.

One is the inflation rate.

If you look at the States at this point in time, it’s somewhere between 7% and 8%, which is exceedingly high.

Second, for the first time in a long time, the United States have increased their interest rates.

Not once, but twice. And it’s reported that they’re looking at another 0.75% increase, which I think is huge.

(The market over there is still very hot, and that’s simply because there’s not a lot of supply due to supply chain issues. That’s why the market is still hot even though interest rates have gone up twice.)

And the third indicator that you might want to have a look at…

Is looking at their interest rates. I’m talking generic mortgage rates there. They’re in about the 5 to low 5s mid 5s, but they talk about a 30 year rate.

Fourth thing I’m looking at in the States, is the stock exchange.

Dow Jones is a good indicator of where our stock market is generally going. There’s a correlation there.

Look at Netflix, it dropped by 30%-40%. And other bubbles are bursting too. That’s something to look at. And start to be aware of.

Local Indicators You Should Be Watching

RBA is obviously a good indicator.

I suggest you go to the RBA website and have a look at what interest rates were doing in 2003… 2004… 2005… 2006… 2007… 2008… 2009… to get a feel for the momentum that interest rate rises had.

Compare that to property market CPI indicators. What else? Well, you may have seen on my previous live videos that I talk a lot about auction clearance rates.

That’s a really quick indicator on the spot, you know?

Saturday afternoon, that’s what I like to do. I’ll just look at auction clearance rates to get a rough idea. Was the market hot today? Or not? It’s a good indicator for what |the people’s| sentiment is. If you can go to auctions, go to auctions and see what people are doing. Have a chat to them. See how many registered bidders are.

When the market’s hot, there’s 5,10, 15, if not 20 bidders plus. More typical market, there might be 1,2,3 bidders at an auction. And I reckon in the next 12 months, probably from next year onwards, buying at auction will be a lot more opportunistic. You’ll be able to buy properties cheaper. That’s my take.

The tables shall turn.

Other indicators that I look at in Australia, is the fixed interest rates. Why is this a good source of information? Because the five year fixed rate shows you what what the banks, who spend millions and millions and millions of dollars on research, think the market is going.

Another good guide which I generally look at is Michael Matusik.

I’ve been reading his reports for the last 20 years. He’s very, very practical. Very, very pragmatic. Takes the politics out of it. Calls a spade a spade. That’s why I like Michael.

So listen, there are a lot of people with BIG mortgages and a plan to hold. They got into the market excited about the 30% growth, and they will probably be disappointed. Because they never really planned to play the long game of buy & hold. They expected a quick and easy win. And they may become very motivated to sell…

In summary, just be cautious. Don’t overextend yourself. And make just one deal at a time. Navigate the timelines because developments take can take 6, 12, 24 months, especially the 3-5 to 10 lotters there. Take rising construction costs into account too. You still should be okay if you have enough margin at the beginning.

Make sure you have enough money to be able to hold you through, and enough margin to be able to make it worth your while. You really need to be doing 20% and 30% margins to be able to hold through these volatile times. (If you can’t find such deals, you really should check out Cracker Deals Secrets)

If you have any questions or comments or any other indicators that you think are worthwhile, please type them in below. Feel free to share this as well.

Talk soon
Nhan

Leave a Comment

Your email address will not be published.