Would higher interest rates on investment loans cool the investor market and what exactly drives investment lending? Two questions I put to Andrew Mirams.
Read the transcript here:
Kevin: It’s very easy to say that investors are driven to borrow more money when interest rates are low, but what really does drive investment lending? Let’s find out with Andrew Mirams from Intuitive Finance.
Andrew, the question for you today is what does drive investment lending?
Andrew: There’s a whole range of options, of course, Kevin. At the moment, we’re sitting at record low interest rates, and the banks are out there very actively competing for business. Those people who are savvy investors are saying, “Money’s cheap.” You have first- or second-time investors. Money is so cheap at the minute that the reality is it’s not costing you a lot of your cash flow to actually hold that property. Low interest rates are one really good driver.
Another of the drivers I see in the market at the moment is the markets have been very strong over the last couple of years. Sydney has come off another really strong year. Melbourne has performed strongly. Brisbane is starting to grow. Perth. I think the only capitol that didn’t perform in 2014 was Canberra. The property market is actually good. When things are going well, it’s a little bit easier to convince people to borrow to buy that investment property.
The third thing I think that we’re now becoming very aware of is the population growth. Australia is growing at a rate of about 400,000 a year, which is basically adding a Canberra to Australia every year. All those people have to live somewhere. With people moving into towns and cities, they all have to live somewhere. If they don’t have the money to buy, investors have to pick up that balance.
Kevin: Certainly the last two you gave us there – prices and population growth – are two drivers you can associate directly with property. I guess interest rates, when you borrow, it depends on what you put it into – whether you put it into properties or shares.
I’m just interested to know if you think that interest rate movements, particularly higher interest rates, would actually cool the investor property market.
Andrew: I don’t think so. In fact, before deregulation, actually to buy an investment property you paid 1% or 1½% more on what you would for a home loan. People still ask that question quite regularly. “If I tell them it’s an investment loan, won’t they change me more?” The reality is it’s a very competitive marketplace out there and your investment loans are viewed just the same as a home loan.
Banks need to borrow money to make money. Would it slow it down? I don’t think so because your investors are going to say, “Well, that’s a cost of doing business.” If you put it up, they’re going to look elsewhere. There’s going to be someone else. Like I said, competition is going to drive that.
I think there’s a lot of speculation around what APRA is going to do at the moment. Their real concern about the investor market is the higher LVRs and people who are getting in or going in because money is cheap and really borrowing to the hilt and going 95%. I think that’s the real concern.
When rates were 10%, 12%, and 18% back in the days when we can probably remember and people laugh at now. It goes up ¼% now and people cry. Ask someone who was paying a home loan at 18%.
Kevin: I’ll put my hand up.
Andrew: Yes, absolutely. We all were. I’m not sure that interest rates will dictate that. It’s going to be all the other drivers in the market, I think.
Kevin: If you look at it, too, the other way and say higher interest rates actually discourage young people from buying properties; they would probably prefer to rent, which means you’re going to mean more rental properties, which probably actually is a bit more of a carrot for investors, I would have thought.
Andrew: Absolutely. It could potentially grow it, you’re right. If your first-home buyers and those upgraders can’t afford to upgrade and buy, an upgrader might say, “We’re living in a nice part of Melbourne; we want to go to the Bayside” or something like that or you want to go for a lifestyle change, you might not be able to afford the property in that area so you will rent. That’s going to drive potentially your investor market even stronger, and it’s going to drive those people out.
Kevin: Andrew Mirams is from Intuitive Finance. Make sure you check out Andrew’s channel too on Real Estate Talk. There’s a new article or video that you put up there about whether you should fix or float your rate. That’s a whole new topic for us, but if you want to find out about that, go and have a look at the featured channel for Andrew Mirams on Real Estate Talk.
Andrew, thanks for your time.
Andrew: My pleasure, Kevin. Have a good day.