Unprecedented low interest rates won't last forever

GUEST OBSERVATION

Over the past year, the Reserve Bank has elected to hold interest rates at an unprecedented low level a level which I’ve never seen during my 42 years practicing real estate.

This has had a marked impact in the property market as historically, continuous periods of low interest rates tend to drive interest in property as an asset class. This is an effect we’ve observed over the past two and a bit years and a contributing factor to the property markets sustained recovery, with the market achieving 15.5% growth since the trough in May 2012.

The Australian property is now entering a very steady adjustment and growth mode driven by the shift to a market where buyers and sellers negotiate a fair price for a property – not one driven by vendor’s expectations.

Despite this, Moody’s recently warned of a growing risk of an overheated Australian property market developing into a real estate bubble, driven by low interest rates and growing interest from offshore investors.

My reaction to this is simple: If the Reserve Bank suddenly raises interest rates suddenly and steeply, it will almost certainly look like we’re in a ‘bubble’.

Similarly, if the world was to experience another global financial crisis, it’s likely that many property markets across the world will look overvalued.

At times such as this, it’s important to remember that in the right situation, almost anything could be deemed in a bubble, but it’s currently unlikely that either of these scenarios will eventuate and push the Australian property market in to bubble territory.

However, I would caution investors, home owners and prospective buyers to budget for the effect any interest rate movements could have on their finance. This is because while interest rates are currently steady at 2.5%, it’s unlikely they’ll stay this low forever.

Buyers who fail to budget for the impact of any potential interest rate increases may find themselves in financial difficulty should the Reserve Bank’s next interest rate movement be upwards.

Charles Tarbey is chairman and owner of Century 21 Australasia.