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Why long-term property investors should ignore interest rates

investor-stories
1 minute read

Why long-term property investors should ignore interest rates

by Cameron Micallef 11 March 2020 1 minute read

Property investors are constantly told lower interest rates are a good thing for the property market;however, a property investor disputes these claims.

RBA
March 11, 2020

On a recent episode of The Smart Property Investment Show, Quay Global Investors principal and portfolio manager Chris Bedingfield explained why long-term investors do not need to worry about the interest rate.

“It’s not as big a driver as what people think. We have seen terrible real estate outcomes in low interest rate environments and weve seen wonderful real estate outcomes in higher interest rate environments,” Mr Bedingfield said.

Mr Bedingfield highlighted how property markets across the country have reacted differently to low interest rates, despite the rate being the same across the nation.

“We have low interest rates in PerthPerth, TAS Perth, WA and we have negative gearing rules in Perth, yet Perths down like 20 per cent from the peak. But Sydney is up,” Mr Bedingfield said.

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The property investor also used examples overseas, where rates were incredibly low which did not have an impact on the property longer term.

“Anyone who thinks low interest rates is great for real estate. Ive got a Japanese real estate fund manager, they can tell you otherwise in less than two minutes,” Mr Bedingfield said.

Even if the rates went to zero and investors faced rates from the unique proposition of quantitative easing, Mr Bedingfield stated overseas lessons showed it will not have an impact on price.

“Its like Japan went to zero interest rates in 1995 and real estate has not been a great asset class there. And similarly, anyone who is sort of expecting QE to cause, create some sort of, economic miracle in the Australian economy. Ive got similar arguments for out of Europe and Japan about how little QE will actually do,” Mr Bedingfield noted.

What is driving property price?

Long-term property investors are told to focus on the price of building rather than interest rates if they are looking to note what is really growing prices.

“In the long term, what really drives it is the cost to build. And so prices go above and below the cost of building,” he said.

“If it costs $20,000 a square metre to build an apartment in 10 years’ time, I dont care where interest rates are, prices are going to be around $20,000 a square metre apartment. They have to be. Otherwise, were not going to build again.”

Why long-term property investors should ignore interest rates
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About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your... Read more

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