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The Recent Interest Rate Cuts and their Impact on Perth Investment Property

Australia’s high interest rates are, most economists argue, what has done the most to shelter the country from the worst of the global financial crisis. This holds true across the board, as other nations like New Zealand and South Africa also took the tough decision to keep interest rates high in the face of dwindling liquidity in financial markets – a move that has, for the most part, paid off.

So what are we to make of the impact of the recent interest rate cuts on Perth investment property? Well, interest rates and the property market have a relatively transparent and direct relationship, so it is usually fairly easy to use interest rates as a predictor of where the property market might be headed.

Perth Investment Property Before and After the Cuts

Before the interest rate cuts, the Perth investment property market was called “stagnant”, or even “bloated” by some analysts. Sellers were holding out because they weren’t going to get the prices they wanted, and buyers were holding out for a price drop – those buyers who could even think about entering the market in these difficult times.

A drop in interest rates usually means two things, which are flip sides of the same coin. It means that more people are suddenly within range of buying either their first home or an investment property, and that there are suddenly fewer people looking to rent (which stands to reason, as most of the new buyers are moving from renting to buying).

The impact this has on the market is that capital values rise, while investment incomes fall – just like the bond market, if you think about it! What keeps this all in check is the global financial crisis and the subtle depressing effect it has on the income bracket that is usually made up of first-time home buyers.

Opportunity for Some, But Not All

In times of global economic prosperity, a fall in interest rates would mean a sudden surge in both new home buyers and people looking to buy Perth investment property. However, the global financial crisis has hit the lower income brackets hardest, so this has a slight “skewing” effect on the demographics of the buying segment: it’s made up of a disproportionate number of investment buyers, and fewer first-time buyers.

What this means is that capital values of Perth investment property will tend to rise, but rental incomes won’t see a corresponding dip. They will see some dip as more people own rental properties that they can’t rent out, but there will be more than enough renters to pick up at least most of this slack.

What the Interest Rate Cuts Mean for You

If you already own an investment property, this means that you should put a few things on your to-do list:

  • Get the property re-valued, as you won’t be able to claim as much tax back from interest payments, and you will hopefully be able to claim more depreciation to compensate
  • Make sure your mortgage takes advantage of the rate cuts if at all possible
  • Investigate the cost of borrowing more now to expand your portfolio

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