Borrowing capacity, affordability, buyers sentiment and FOMO: What does the rate cut mean for investors?
Following the Reserve Bank of Australia’s rate cut, a property expert forecast that investors would move quickly to expand their portfolios, as more people are expected to enter the market.
As the RBA cut the cash rate by 25 basis points, bringing it down from a 13-year high of 4.35 per cent to 4.10 per cent, investors across the country are picking up the pace, showing renewed interest in their portfolios.
Arjun Paliwal, CEO and head of research at InvestorKit, said the rate cut will affect the property market in three ways: borrowing capacity, buyers’ sentiment, and mortgage holders’ affordability.
According to Paliwal, a 0.25 per cent cut will improve borrowing capacities in Australia by 2–3 per cent.
“The first impact is the improving borrowing capacity for investors. It is the smallest one, but will still make a difference and will compound as more rate cuts happen.”
Additionally, the property expert said the cash rate cut would also bring relief to borrowers, boosting their everyday spending.
“Now, whether they have savings accounts and keep more money in offsets to reduce interest rates, spending money and travel holidays more to lift the economy or covering a few of the household bills, we’ll see money flowing in other ways or money-saving improving,” he said.
Paliwal said the biggest shift in the property market focuses on buyers’ sentiment.
He said many investors were waiting for a “sign” that the property market was improving before continuing to build their portfolios.
“For many investors, it isn’t about monetary change; increasing the borrowing capacity by 2 per cent doesn’t mean you can suddenly buy another house.
“Many people were able to do the purchasing in the past, but they just were after a sign of times getting better – they just needed the news to turn around so they feel confident again to invest.”
Paliwal said the market will see two types of investors in the coming weeks and months: the ones who will move forward and “squeeze” in an extra asset sooner rather than later and the others waiting for more cuts.
“We’ve already seen a substantial increase in inquiries from our side, driven by positive sentiment. If investors have the ability to invest, they now believe it is a good time as they see things coming.
“Others will wait for more cuts to improve their borrowing capacity further and be able to review their purchase prices to have more options.”
Paliwal said that as interest rates decrease and borrowing capacity rises, people stuck with purchase prices of around $500,000 to $600,000 may find higher priced properties more accessible, especially in areas that haven’t grown as much in recent years.
While many can expect the market to become more competitive over the coming months, the property expert said it is still too early to tell if the decrease in interest rates could also give vendors more confidence to list.
“The idea here is that all property investors should keep a close eye on the dynamic of listings increasing and sales volumes occurring; if things are selling fast, that means even with listings increasing, the market will be stronger.“
With the property market shifting, Paliwal warns investors not to consider FOMO when making their next purchase decision.
“Investors shouldn’t ever think of FOMO when making decisions and make a costly mistake or an investment they feel uncertain about.”
“I always encourage people to invest every year, whether it’s now, next year, the year after, whether there are more in cuts, fewer cuts – there’s always going to be a market somewhere where we can see has high-performance potential,” Paliwal concluded.