Key Concepts
- Borrowing Capacity
- Tightened Selling Finance Constraints
- Investing Lack of Interest
- Government Intervention and Support
Lowered Access to Credit
As inflation increases and interest rates rise, the borrowing capacity dollar for dollar effectively decreases. What a person or couple could have borrowed previously, now decreases substantially due to the increase in interest costs. This means people will be unwilling or unable to afford higher priced property either in their own opinion or forced by the bank’s unwillingness to lend based on serviceability restrictions.
People’s inability to buy at prices that are above market value will help to decrease the market to a more sustainable level. This could help to drive the valuations lower when owners are refinancing and adding to their portfolio as well. This double whammy of price decreasing may have a big impact on property values.
Pressure to Sell due to Financial Constraint
As costs rise significantly, the financial pressure on households increases. Unfortunately for investors, increased interest and loan costs does not necessarily mean increased rental income or increased wages in line with inflation. This means that home owners have a few options to alleviate the financial pressure.
- Get more jobs, increased pay or start a side hustle
This will help to increase the income coming in to counteract the payments going out. This also requires dedication and effort, which some people may not choose to continue with as home ownership may not be as important as say, hobbies, family or social life for example.
- Sell and downsize
Reducing cost of living by downsizing is an option, remove or reduce the debt and live within the current means, taking the pressure off finances and living a simpler and hopefully more enjoyable life.
- Get Creative
Home owners can get creative by reworking their debt (refinancing) which could mean reduced costs. The other consideration is to use up spare space with storage rent or rent out a room to someone. The road to wealth or financial freedom doesn’t always have to be glorious and unfraught with sacrifice.
Investment Opportunity
Since property investors are generally looking for 2 things, one concept is the money. Rental income or capital growth means money now or money later. The other concept is tax savings. If wages increase with inflation and people find themselves in higher paying jobs, tax deductions become more attractive as the tax rate increases and the value of holding that money to spend is drastically reduced. Property can offer excellent tax deductions and be a great way for these higher wage earners to increase investments by sacrificing some of their money to property.
Since the tax rules will likely stay in favour of property investing for now, investors on lower wages or those not thinking about tax benefits will have one consideration. Will this make me money now through rental income, or will I eventually get more money later through capital gains? If the market is on a downward trajectory and rent doesn’t keep up with interest rate costs, investors may seek alternate options such as investing in active businesses in the share market. If it doesn’t make financial sense to enter the market as an investor, this may help push down prices to a more favourable figure before investors reconsider the property market.
A Positive Slant
On a positive note, property has a series of concepts running in its favour. Government conditions around property are very favourable, based on the rules and regulations such as tax benefits. If inflation drives wage growth, higher wage earners may look to seek tax deductions through negative gearing and utilize the effective concept of depreciation, particularly from new builds, to help reduce their taxes.
Governments often protect the property market in some way through grants and funding. This is partly due to the fact that people need somewhere to live and shelter is a very important part of social welfare. The other reason behind the government support is that banks loan books are heavily geared on Australian property and banks are somewhat protected since they are a massive part of the economic environment and financial stability of the country. This support helps keep a stable environment for people to both live and spend their money, but also supports what is generally a strong market considering that property isn’t a business, but drives incredible results for many people.
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