Is now really the best time to be purchasing a property or is that just what everyone's telling you to do?
If you’re like me I’m assuming you might have some interest within the economy, and or the property industry, and are most likely subscribed in some form or another to a range of different sources that relate to these particular topics. I often receive from the person or organisations frequent and sometimes non frequent updates and posts expressing their views on the property market.
Often, these people who consider themselves to be a thought leader in the property industry will email me an update or a link referring me to the announced decision that was made by the RBA that day, determining the cash rate for the up and coming month.
Well as I’m sure these people are anxiously waiting for the next scheduled RBA meeting to be held on the 7th of February and to help publicly share the news I thought I’d get in a little earlier. Will the Reserve Bank of Australia agree to drop the cash rate, leave it alone or increase it? Well many people are saying that it will drop again next month, but what is the cash rate and how does it affect us?
The cash rate is simply a percentage the Federal Reserve Bank (in Australia this is called the Reserve Bank of Australia or the RBA and this is the institution that administers all other banks) sets as a guideline for the other banks to follow. There are certain restrictions commercial banks must attend to, but ultimately the movements in the cash rate result in the movement of the interest rates for mortgages, personal loans, finance, etc.
This institution doesn’t just meet on the first Tuesday of every month to make a decision to either drop, increase, or leave the cash rate. The Federal Reserve monitors the following areas which make a significant contribution to the economy; consumer spending, GDP (Gross Domestic Production), inflation and unemployment rates. The Reserve Bank can then make adjustments within these areas by selling and buying back government bonds. This is called monetary policy and it is enforced to influence the behaviour of borrowers and lenders within the money market. To find out more about this process visit http://www.rba.gov.au/monetary-policy/about.html
You might be familiar with phrases like, “it’s a great time for astute buyers to be getting into the property market,” or, “there has never been a better time to buy a property” that we regularly hear from our most trusted property commentators. Although at some point I must disagree with this assessment for the following reasons:
As we all know, property market prices have had a significant trim in many areas around Melbourne (and the World) and in some areas have dropped greater than 30%. No one actually knows if the property market will continue to fall or whether we have reached the bottom of the current downward trend. The consensual theory at this point is the property market will continue to trend downwards and this could mean there will be a better buying opportunity for you still further down the track.
There is also the risk of purchasing something now and having to face the value of your property dropping below what you paid for it. There is evidence of non-performing loans on the slight increase from .686% to .697% which represents approximately $98.8 million of Australia’s housing loan commitments. Non-performing loans are mortgages that are not being repaid generally because the loan over the property is greater than the property’s actual market value, or due to an individual’s financial situation. This has been a constant theme in some locations including the Gold Coast and even more so on the Sunshine Coast in a town called Noosa.
Having recently witnessed an incredible property boom there is noise amongst the property world that it may take some time for the market to commence trending upward again. This would either mean the market would need to continue falling, or stay flat while it waits for everybody to dust themselves off and get back on the horse, so to speak. In the meantime, property prices will continue to stay the same and the only way you will make money will be to ‘add’ your own value. If you’re purchasing in a flat market and selling in a flat market, it then becomes very easy to ‘crunch the numbers’ which make up your deal.
Let’s face it, do you really believe the RBA is thinking about your Christmas budget and has generously decided to knock off .25 of a percentage so you have that little bit extra to spend? Well, in some ways yes, but not entirely for your benefit. It stimulates consumer spending which then helps to balance out inflation. The government and the RBA need you to boost the economy and by decreasing the interest rate this enables you to splurge a bit more over the Christmas period.
Don’t just listen to what everyone else is saying. There are some positive signs to the property market but you need to be aware of the challenges that might be faced. The best thing you can do while you wait is to get educated! You aren’t going to miss out on anything just yet, but the more opportunity you have to gain knowledge of ‘value add’ strategies and how to apply them, the more involvement you can have in the current state of the market. This will lead you to a greater upside when the market decides to boom again.
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Yours in Property
