The Reserve Bank of Australia’s decision to drop the official cash rate to 2.25 per cent is a wake-up call for people who sat on the sidelines of the property market last year, convinced that property prices were too high.
With interest rates dropping – and another reduction probable this year – consumers have to focus on what they can control, rather than concerning themselves with huge factors such as RBA decisions.
The components of the property market most people can control is loan affordability and buying well.
Let’s start with affordability: interest rates have not been this low for half a century and consumers should not ignore the opportunity, even if low interest rates come with rising property prices. When you consider the alternative – the 19 per cent mortgages that my generation paid for their first homes – it is amazing that people are baulking at the current mortgage market.
This means you start with a big range of home loan interest rates. If you take a home loan of $400,000 over 25 years at 5.6 per cent, it will cost you about $234 more per month more than the same loan at 4.6 per cent. When thinking-through loan affordability, and your ability to repay a loan if the rates rise by – say – 2 per cent, remember that by shopping around now you can already build-in a 1 per cent buffer on the expensive lenders. This is entirely within your control and the options exist.
And what about the other component of the property market, buying well?
When people have an approval from a lender they can become carried away; perhaps they missed out at a couple of auctions and don’t want to be gazumped again? Perhaps they are panicked about rising prices?
I suggest you take your time, do your homework and and avoid being bogged down in the property indices. Develop your own criteria and stick to it. Do your own research, talk to real estate agents walk around suburbs and talk to people.
As for worries about rising property prices – and the potential for a correction – remember that Australian residential property prices may rise by around 6 per cent a year, but these figures are averages over 10 years. There are always corrections but over the full decade most owners make gains.
The Reserve Bank has set the low-interest rate environment for 2015. Now it is your turn to take control: focus on loan affordability, and buying well. In all property markets, these are still the basics of getting it right.