Interest Rates Have Risen to 4.60%. What Should Property Investors Do Now?
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The
Reserve Bank has raised the cash rate by 25 basis points to 4.60%, a 15 year high. And for property investors the first
calculation will naturally be the effect on their mortgage repayments.
If you own investment property/properties, particularly if you're trying to build beyond one or two properties, the effect of another rate
rise extends well beyond the next monthly repayment. It can change your borrowing capacity, alter the cash flow across your existing
portfolio and affect how comfortably you can use equity for another purchase.
In some cases, it can change whether the property you were planning to buy next still makes sense at all.
For established investors, I would use this as an opportunity to look further back through your property portfolio as well. If you were
building it again today, knowing what you know now and working with today's lending conditions, would you still buy everything you currently
own?
What changed this week?
The RBA increased the cash rate target from 4.35% to 4.60% pointing to elevated inflation, stronger recent inflation outcomes, global energy prices and continuing domestic capacity pressures in explaining the decision. At the same time, it noted softer consumer spending, falling housing prices across most capital cities and a noticeable decline in new housing lending.
There is another number you should also focus on alongside the cash rate.
Australia's unemployment rate reached 4.6% in August, up from 4.5% the previous month, with around 28,000 more people
unemployed over the month and underemployment at 6.2%.
For us, that means the property portfolio planning conversation isn't confined to interest rates. We’re looking at borrowing costs alongside household income, employment, rental income, property expenses and lender servicing. Those numbers interact with each other, and the effect will be different from one investor to another.
This is exactly what we're unpacking in Episode 7 of The Ramsey Report.
Rather than treating the RBA announcement as a reason for every investor to react in the same way, we've looked at three common positions we
see across property portfolios.
How do I get from property one to property two in this interest rate environment?
Consider an investor who owns their home and one investment property. They've earned good income, the investment has performed reasonably well and perhaps there is $150,000 or $200,000 of equity sitting in it.
It's quite natural for the conversation to begin with that equity: How much of it can I use to buy the next property?
I'd start with borrowing capacity instead.
An investor can have substantial equity and still have limited ability to deploy it. We need to understand the home debt, investment debt, repayments, rental income, household income and expenditure, cash reserves and how lenders are going to assess the existing liabilities. Only then does it make sense to start working through the next acquisition.
And there is another part of this calculation that becomes increasingly important once somebody decides they are building a portfolio rather than buying a standalone investment.
What happens after property number two?
If we can get an investor into their second property today, but the type of property, its holding cost or the way the debt is structured severely restricts their ability to reach property number three, we haven't necessarily solved the problem. We've moved it further down the road.
This is why acquisition sequence and lending strategy have to be considered together. A perfectly reasonable investment property can still be bought at the wrong point in a portfolio.
The move to 4.60% doesn't automatically mean this investor should stop. It means the borrowing position and the next acquisition need to be
run again using today's numbers.
I own several properties and cash flow is getting tighter, how do I move past this interest rate rise?
The second investor is in a very different position.
They may own three investment properties that have performed well, have considerable equity on paper and receive good rental income. From the outside, the portfolio can look extremely healthy. Yet every month they are transferring more of their salary into it.
When borrowing costs rise again, that gap can widen.
At this stage, I become less interested in whether a lender will technically approve property number four and more interested in how much additional pressure the portfolio can comfortably carry.
That starts with understanding what the portfolio genuinely costs to own. Interest is only part of it. There are council rates, insurance, property management, maintenance, body corporate where applicable and periods of vacancy. Then there are the normal financial demands of the household sitting behind the portfolio.
Our current portfolio modelling can test borrowing costs at approximately 8% all-in. That isn't a forecast that the RBA cash rate is heading to 8%. We deliberately put more pressure into the assumptions because I would rather find the point where a portfolio becomes uncomfortable in a model than have the investor discover it six months later in their bank account.
We can then test what happens if a property is vacant for a period, an unexpected repair appears, rental growth is slower than anticipated or household income changes.
A portfolio that only works when every assumption goes right is giving us valuable information about the next acquisition.
Sometimes the numbers will still support property number four. Sometimes it is better to wait, review the lending structure or build a larger cash reserve first. In other cases, nothing significant needs to change.
We aren't running the exercise because we're looking for a reason to transact. We're trying to find where the constraint sits before the
investor commits more capital.
I've been investing for years, what do I do next?
The conversation changes again once somebody owns five or six properties.
By this stage, adding property number seven isn't necessarily evidence that the portfolio is progressing. There is usually a considerable amount of capital already deployed, and I want to understand whether that capital is still working in the right places.
One of the questions I like to ask established investors is:
If you didn't already own these properties, would you buy every one of them today?
That doesn't mean an older property should be sold simply because circumstances have changed. It may have been an excellent acquisition and may remain an excellent asset. But the portfolio has moved on since it was purchased.
Income changes. Debt changes. Equity builds. Markets change. Family circumstances change. What an investor is trying to achieve over the next five or ten years may bear little resemblance to what they were trying to achieve when they bought their first property.
So rather than judging an existing property solely by how much it has grown, I would look at its current value, debt, net rental income, holding cost, equity position and the market it is exposed to. Then I would look at the role it is performing within the portfolio now.
There is an opportunity cost to capital as well. An investor can have significant equity and still find themselves unable to make their next move. Equity tied up in one asset cannot be deployed somewhere else, existing debt consumes borrowing capacity and several properties concentrated in one location can leave the portfolio heavily exposed to a single market.
The question eventually becomes less about whether each individual property is “good” and more about whether the investor's
equity, debt capacity and cash flow are still being deployed in a way that supports where they want to go next.
A national rate rise doesn't create one national property market
The RBA sets one cash rate for the country. Property doesn't behave in the same way.
The RBA noted in its September decision that housing prices had fallen across most capital cities. Even that doesn't tell us enough to make a property decision.
Conditions can differ considerably within the same city. Supply, affordability, employment, construction pipelines, rental demand and buyer demand all change between markets and price points.
This is why I'm not particularly interested in broad statements about whether “Australian property” is going up or down. I want to know where the properties are, what's happening to supply and demand in those markets and whether those assets still fit what we're trying to achieve with the portfolio.
The better question following the move to 4.60% isn't simply what higher rates will do to Australian property. It's what the new borrowing
environment does to the properties you already own and the one you're considering buying next.
So, should investors keep buying?
There isn't one answer.
For some investors, another acquisition will still make sense. For others, waiting could preserve borrowing capacity or allow cash flow to recover. Some may discover that the property isn't the problem at all and the finance needs attention first. Established investors may find that reviewing the capital already deployed across the portfolio produces a better decision than immediately looking for another purchase.
I would start with five numbers: what the portfolio is genuinely costing each month, current borrowing capacity, usable equity, actual cash reserves and the expected financial position after the next acquisition.
Then look at what that next property is supposed to do.
Is it there for growth? Cash flow? Geographic diversification? Is it intended to preserve enough borrowing capacity for another acquisition after it?
If there isn't a clear answer, I wouldn't rush the purchase.
A good property isn't automatically a good portfolio decision.
We don't build portfolios around predicting the RBA
There will always be another RBA meeting, another inflation result, another employment number and another change in lending policy. Anyone building a property portfolio over ten years is going to invest through different governments, interest-rate cycles, credit conditions and property markets.
The purpose of our research isn't to pretend we can forecast every turn correctly. We use it to put better assumptions underneath the decisions being made now.
If a portfolio only works if interest rates fall quickly, we want to see that in the modelling. If property number four requires strong growth across every existing property, we want to see that too. If another purchase leaves the investor with very little cash or makes the following acquisition substantially harder, those are constraints we would rather identify before the property is bought.
Equally, if we put the portfolio through that process and the numbers continue to work, there may be no reason to change course simply
because the cash rate has moved.
Watch The Ramsey Report: Episode 7
This is the conversation Ewan Ramsey and Dr Prabath take further in Episode 7 of The Ramsey Report following the RBA's decision to increase the cash rate to 4.60%.
They work through three investor situations: somebody trying to reach property number two, an investor with several properties whose cash flow is tightening, and an established investor questioning whether every asset they own still deserves its place in the portfolio.
RBA Raises Interest Rates: Does Your Property Portfolio Plan Need to Change?
If you are looking at your own portfolio following the rate rise, start with what you already own. Put the debt, rental income, household income, holding costs, equity, cash reserves and next planned acquisition in the same place and run them under the new numbers.
You may find the next property needs to change. You may find the lender or debt structure is creating the constraint. You may need to reconsider acquisition sequence or look more closely at an existing asset.
Or you may find that the portfolio is doing exactly what it was designed to do and there is no reason to change anything.
The numbers should make that decision, not the headline.
Article Contributors
Written By:
Ewan Ramsey
Founder, Director and Investor
PhD research conducted by:
Dr Prabath Morawakage - PhD, CPA
PhD, Real Estate Finance and Economics at Ramsey
General information only. This material does not constitute personal financial, credit, tax or investment advice. Ramsey Property Wealth Pty
Ltd | ACR 389087.