Welcome to the Entourage Report for 2021/22
This year saw two major topics making headlines across the country: house prices and interest rates. From a housing bubble to a housing market crashes, looming rate hikes and first home buyers completely priced out of the market, we heard it all. Sensationalist headlines aside, we’re sitting in an incredibly low interest rate environment with the cash rate at 1.35%. No one is under any illusion though, rates will probably increase for the balance of the year until inflation is bought back to the 2-3% sweet spot.
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Preparing for future rate rises
There are a couple of options to reduce rising interest rate pressures. The first is to make repayments at a much higher rate than the minimum. For example, calculate what the repayment will be here if rates hit 5% or even 7% and increase your contribution accordingly.
Another option is to park as much money as possible into your linked offset account. Every dollar sitting in offset reduces the balance interest repayments are calculated at. This means a mortgage of $1M with $200K in offset will be charged interest on $800K. Based on these figures and a rate of 5% on a 30 year term, interest charged would drop by around $348 per month or over $4K across a year.
How high can rates go?
In the 1980’s interest rates peaked at 17%. Our current cash rate sits at 1.35% which is negligible in comparison. Anyone who’s owned a mortgaged property for more than ten years will have experienced rates three times higher than this.
So for those worried about where interest rates will go, at this point in time, they’re going up. But no one has a crystal ball. There could be another global financial crisis, pandemic or something else unforeseen that which occurs and sends rates plummeting again.
The gap between fixed and variable rate products also changed. The discount to fix in a home loan interest rate rather than hold it at a variable rate is around 0.5 per cent.
The RBA went on to drop the cash rate to a record low of 0.10 per cent and have stated they plan on leaving it there for three years. This also impacts the rate the banks pay on the funds they access to lend to borrowers, keeping downward pressure on rates for the foreseeable future.
Property Update
Property prices across Australia increased 14.1% throughout 2021/22. Capital cities saw an increase of 11.7% combined and regional areas grew in value by a huge 22.1%.
According to Core Logic, growth is slowing now across markets, with some capital cities beginning to see a decline in values. The last two residential property cycles in Melbourne ran for around 18 months with around nine months of growth, followed by nine months of decline.
The total value of residential real estate increased to $9.97 Trillion, up from $8 Trillion the year prior. Outstanding mortgage debt sits at
$2.1 Trillion, also up from $1.9 Trillion year on year.
Commercial real estate cracked the Trillion-dollar threshold too,
boasting a total value of $1.2 Trillion.
Top Suburbs
Top growth suburbs according to REIV for the March 22 quarter are quite different compared with the list we saw last year. When someone says a suburb has “peaked” Brighton is a perfect example of the fact that a suburb has never peaked as it’s maintained a continuous trajectory and is consistently in the REIV top growth list.