What Rising Interest Rates and Property Prices Mean for Investors in 2023

After years of low interest rates and increasing property prices, we have certainly entered an interesting time in the market lately.

As interest rates start to increase and property prices stabilise or slightly fall, there are a lot of people speculating on what this means for homeowners over the next 12 months or so, particularly those coming off low fixed interest rate periods. 

But what do declining property prices and increasing interest rates mean for investors?  As a trusted property management team in Perth, we’ve had plenty of conversations lately around this topic with both current investors and those looking to enter the market.  

Before we delve too far, it is essential to remember that the property market is, like many other markets, subject to fluctuations in pricing due to supply and demand. There is quite a high demand for property recently, particularly rental properties, so the current market may not be as bad for investors as it is for owner occupiers.  

Declining Property Prices and Investors  

Whether you are an investor or an owner occupier, declining property prices aren’t exactly a bad thing when it comes to purchase price. It can present an opportunity to purchase property at a lower price, which can result in a better return on the property in the long term. Those who have the ability to purchase when the market is on a downward trend, tend to benefit both from lower prices as well as better gains when the market turns upwards again (and property tends to appreciate in value over time).  

However, the downside to purchasing when the market is low is that it may not recover quickly and if you have no intention of holding onto the property for a long period of time, or you need to sell quickly, you may find yourself losing money when you do decide to or need to sell. Property is a long term game - on average, investors tend to hold their properties for 10-13 years before selling, and within that time, the market is likely to turn upwards again.  

Where declining prices can really be a detriment is in rental prices. A declining property market is usually a good indicator of a declining economy, and this may mean that properties cannot be rented out for the same price they were when the market is higher.  

For those who are investing in rental properties, your income may decrease while the market is lower, however it is solely dependent on supply and demand. In the current market, we are seeing a 1.4% vacancy rate nationally, with many individual markets well below this. This means that while property prices are declining or stabilising, rentals are still in high demand, so prices are still high.

For those investors who focus on buying properties, renovating and then selling again, a declining market can be a great way to pick up a bargain, however it is certainly worth considering whether this is a viable option, particularly with the increasing expense of trades and supplies.  

If you have the capital to purchase and are willing to hold onto the property until the market is on the up again, now can be a great time to purchase as an investor. It is however important to be aware of what is happening economically, and whether there are any potential risks to your portfolio.  

Increasing Interest Rates and Investors 

What are interest rates doing? It seems to be the talk on social media and news outlets at the moment. And that’s understandable - interest rates are an essential factor to consider when buying property; they affect mortgage payments, housing affordability and the general health of the property market. But are they good for investors?  

Traditionally, when interest rates increase, it becomes more expensive for buyers to obtain a mortgage, which can decrease demand for property. This decrease in demand often ends up resulting in a decline in property prices, which if you are selling as an investor may mean it makes it harder to make a profit. If you are buying however, you may snag yourself a bargain.  

It is important to note that interest rates don’t affect property prices on their own, and there are many other factors at play.  

One of the biggest benefits of increasing interest rates for investors is that it leads to a more stable property market - prices are rapidly rising every week, and they aren’t taking huge falls. Low interest rates can cause a “boom and bust” cycle whereby property prices increase when interest rates are low as it is easier to get a mortgage, and then when interest rates increase, prices plummet because there are more properties competing for less buyers.  

It is interesting to note that while low interest rates mean more buyers in the market, which is good for those investors looking to sell, a higher and more stable interest rate can lead to more moderate price growth and sustainable returns, meaning that you don’t need to time the market when looking to sell.  

Higher interest rates also tend to attract long-term investors to the market, as opposed to short-term investors looking for quick gains. These higher interest rates can force some of the less committed investors to sell, leaving more options for those looking for long-term investment options. Again, this can lead to a more stable market, particularly for renters.  

While there are benefits, there are also some negatives. Like all homeowners, an increase in interest rates often means an increase in higher monthly mortgage repayments. For investors, this can mean a need to increase the rent, or to soak up the increases with less overall profit.  

Increasing interest rates can have both positive and negative effects on property investors so it is certainly important to consider these within your property plan, and consult with financial experts before you make any decisions on whether to buy, sell or change your mortgage.  

Making a Decision on Whether to Invest in Property  

Investing in property can be a good way to build long-term wealth with a steady stream of income, but particularly when the market is rapidly changing, it is important to consider whether investing aligns with your financial goals and personal risk tolerance.  

So what factors do you need to consider when making a decision to invest in property or not in 2023.  

Determine Your Financial Goals 

Before making any type of investment, it is important to identify and understand your financial goals. You need to know what you want from your investment - do you want passive income? Build long term wealth? Having a good understanding of your goals can help you understand what level of risk you are happy with and whether it is a good time to invest in your preferred property style.  

Consider Your Budget and Financing Options  

There’s no doubt that investing in property can be expensive, and it is essential, particularly when interest rates are increasing, to consider your budget and financing options carefully, particularly your ability to pay mortgages and other costs should your property not be tenanted.  

Research the Market 

As with any investment, the property market can be complex and confusing and it is important to research the area you are interested in before making an investment. You should consider factors such as location, property type and any potential rental income, as well as how attractive that style of home is to tenants. Taking the time to research and understand the market you are entering, helps you make informed decisions that relate back to your financial goals, and may help to identify what could be a lucrative investment opportunity.  

Assess the Potential Risks  

Investing in property comes with its own risks and again, it is important to assess these carefully. Particularly in the current market, you should consider economic downturns, further changes in interest rates and how you would cover unexpected repairs or maintenance. Having an understanding of these risks allows you to prepare for them up front, and potentially mitigate any impact they may have.  

Consult with Experts  

Before making a decision on whether to invest in property in the current market, it is wise to seek advice from those in the know. Consulting with financial advisors, real estate agents and property management in Scarborough will give you a better understanding of the current market and any potential investment opportunities out there.  

Long Term Views  

Property investment is a long-term commitment, and it’s important to understand that before you purchase. You need to consider whether you have the appetite for long term risk and whether the potential return on investment over time aligns with your financial goals.  

What Should Investors and Potential Investors Be Doing in 2023?  

It’s true that no one has a crystal ball, and no one knows what will happen with property prices or interest rates in the next few months. If you are an investor or you are looking to invest in property, it is certainly beneficial to do your research, decide what your appetite for risk is, consider whether you are willing to hold long term, and get some solid advice from the experts.  

Thought Leaders Real Estate are your leading real estate agency in Perth, and can help you with buying or selling your next investment property. Contact our friendly team today.