Why landlords aren’t worried about rate rises

97 views 2022-02-28 13:54:23

Higher mortgage interest rates will affect cash flow for property investors, but surging rents and larger buffers will help cushion that blow, experts say.

Pete Wargent, co-founder of buyer’s agents portal BuyersBuyers said existing investors were most likely to absorb higher interest rates, given that mortgage rates had remained at record lows and buffers had increased over the past two years.

“Cash flow is fairly comfortable for most existing investors due to record low mortgage rates and rising rents,” he said.

“Some investors will aim to increase their rents when the next rental review comes around, especially given that vacancy rates are already at a 16-year low in January, and have declined further in February.”

Sydney-based property investor Arthur Vekiarellis said he expected the looming mortgage rate increases to have a minimal impact on his three rental properties.

“My cash-flow situation is quite good at the moment because rents have been strong, and I have not over-borrowed,” he said. “I think it depends on how much the RBA will raise the interest rate, but personally, I don’t find it worrying because the banks stress-tested our borrowing capacity on higher interest rates to ensure we can service the loan if the rate rises say by 2 per cent.

“I also have savings that I could tap into, if things get a bit tight. However, higher mortgage rates will impact my borrowing capacity when I take another loan because the assessment rate will be higher, so the amount I’ll borrow will be lower.”

The beer-cigarette equation

Jack Henderson, a buyer’s agent with Henderson Advocacy, who helped Mr Vekiarellis secure two of his investment properties, said most investors would be able to ride the expected rate rises this cycle.

“If you’ve got a million dollars worth of debt and mortgage rates go up by 0.25 per cent, that’s $2500 a year, which equates to one carton of beer a week or a packet of cigarettes. So, there’s a lot of things people can cut out of their life to deal with rate hikes,” he said.

“I think interest rates will have to increase by at least 2 per cent to 3 per cent to have a significant impact on investors.”

Peter Esho, co-founder of property investment company Wealthi, said a rise in interest rate would hit owner-occupiers more than landlords.

“Owner-occupiers will fare worse than investors because the increase in rents offsets the rising interest cost for landlords,” he said. “If you buy a good investment, which can grow its income faster than interest rate increases, you’ll actually benefit from interest rate rises.”

Market conditions

Kent Lardner, director of Suburbtrends, said rental market conditions were set to get even better for landlords as the international border reopened.

“The arrival of international migrants will place a significant squeeze on the rental market, especially over the short-term,” he said.

“I expect the last remaining pockets of higher vacancy rates will vanish rapidly, specifically within the inner-city markets.

“I think the inner-city unit markets will see the biggest positive market shifts. I would not be surprised to see rents in inner Sydney and Melbourne jumping by 15 per cent in the coming 12 months.”

Mr Wargent said he also expected the two-year backlog of new arrivals wanting to enter Australia to fuel rental rate rises of between 10 per cent and 20 per cent nationwide this year because of tight supply.

“I think rental supply is unlikely to respond fast enough, especially given there aren’t as many investors from the Chinese mainland these days to drive new apartment sales and construction higher,” he said.

“Many investors also sold in a panic during the lockdowns, which reduced rental supply, and many households bought second homes to gain additional space, which in turn has depleted the available rental stock.

“At the same time, many of the younger cohort left home to seek rentals after the lockdowns ended too, increasing demand.”

This article is from Australian Financial Review, please click the following link for the original article: https://www.afr.com/property/residential/why-landlords-aren-t-worried-about-the-looming-rate-hikes-20220217-p59xah

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