Interest rates – will they drop or keep increasing? Or stay where they are?

What’s happening with interest rates?

Inflation and interest rates, and why it matters for property investors

In the Statement on Monetary Policy, released by the Reserve Bank of Australia (RBA) in August 2024, the consensus was that “Inflation is still too high because demand is still too strong.” And when inflation is high the RBA will continue to increase interest rates to slow the economy and consequently, lower inflation.

But why is this question “interest rates – will they drop or keep increasing?” so vital for property investors? It’s because interest rates are crucial in shaping our economic landscape and will most definitely influence property investment decisions.

In this blog post, the property investment experts at Capital Properties will examine the current interest rate environment, factors influencing rate changes, and make cautious predictions about what the future might hold.

If you’re an Australian Defence Force (ADF) member looking to invest your disposable income in property, understanding the trajectory of interest rates is essential for making informed choices. And at Capital Properties, our aim is to provide you with all the knowledge and tools you need to make the best investment decisions for your situation. Join us at one of our Discovery Sessions to see if you should consider investing this year.

The Capital Properties Property Investment Tools & Apps and Pinnacle Support Program are designed to keep you on the right track throughout your investment experience.

On the go? Here’s 30 seconds of take outs:

• “Inflation is still too high because demand is still too strong” – RBA, August 2024
• Since COVID, the RBA has adjused the cash rate to manage economic conditions & inflation pressures, keeping interest rates high to curb inflation.
• The factors that influence interest rate changes are:
• Inflationary pressures
• Global economy
• Economic growth
• Housing market
• Consumer spending
• Unemployment rate
• Household debt
• Short-term outlook for interest rates predicts stasis or another increase, with first cut made between November 2024 & May 2025.
• Long-term outlook is an interest rate decrease as inflationary pressures ease and economic growth stabilises.
• Lower interest rates make borrowing more affordable but is also likely to create more competition in the market.
• Strategies to consider in current interest rate climate:

– Re-evaluate investment strategies to benefit from rental income & capital growth.

– Stay informed of economic developments & interest rate forecasts.

– Consider locking in fixed rates.

– Consult with the experts at Capital Properties.

Keep reading >>

The current interest rate climate

Australia is experiencing a complex interest rate environment shaped by numerous economic factors. Since COVID, the RBA has been adjusting the cash rate in response to these vastly changed economic conditions and inflation pressures. All through 2024 the RBA has tried to curb inflation with a series of rate hikes. Which means that compared to the previous decade, current interest rates are relatively high.

In Australia right now, there’s still high demand for goods and services, which means inflation is likely to continue. And, although productivity growth is weak, wages growth remains high, so it seems like lower interest rates are a way off.

What’s causing interest rate changes?

There are a variety of factors that influence interest rate changes, such as consumer spending, unemployment rate, and household debt. But we’ll take a closer look at the most significant influencing factors below:

• Inflationary pressures: Inflation is still a significant concern for the RBA. The measure of consumer price inflation is the percentage change in the Consumer Price Index (CPI). Over the past 12 months to the June 2024 quarter, the CPI rose 3.8%. The RBA needs the CPI to return to the target range of 2 – 3% before they can lower interest rates​. We’ve explained all about inflation before in the blog post “US inflation peaked? What does that mean for Australia”.

Global economic conditions: Although Australia is lucky to have a plentiful supply of natural resources that keeps our economy buoyant, we’re still not immune to global economic trends. Changes in major economies like the United States (US) and China can impact Australia’s interest rate decisions.

• Economic growth: As demand for goods and services increases, the resulting strong economic growth can lead to higher interest rates which contribute to inflation.
• Housing market: The Australian housing market is a vital component of the economy. Factors such as housing supply shortages can influence inflation and, subsequently, interest rates.

Predictions for the future of interest rates in Australia

To answer the question about interest rates – will they drop or keep increasing?… we can’t gaze into a crystal ball, but we can make some educated guesses.

At the beginning of 2024, Australia’s inflation rate started at 4.1%. By March, it had dropped to 3.6% but went back up to 3.8% in June. In August, RBA Governor Michele Bullock denied any hope of an interest rate cut until the end of the year, or beginning of 2025. Their target, is of course, to be back to 2-3% inflation – ideally by December 2024.

Economists have plenty of different opinions on the future trajectory of interest rates in Australia. Some predict a gradual easing of rates in the coming years as the inflation pressures subside and economic conditions stabilise. However, there are just as many others who believe that rates will stay elevated if inflation continues to persist. At the time of writing (mid-September 2024) Australia’s cash rate is sitting at 4.35% – that’s a big shift from 0.1% in May 2022.

And the latest news out of the US, with the Federal Reserve slashing interest rates by a whopping 50 basis points has startled many economists. Though, as Capital.com senior financial market analyst Kyle Rodda says, the US and Australia are “fighting different battles” and there are “unique” factors that contribute to persistent inflation in Australia.

Short-term outlook for interest rates

In the short term, it seems that most experts concede that interest rates will stay relatively high as the RBA continues its efforts to control inflation. Some predict the next interest rate move could go up. Most major Australian banks predict the first cut will be between November this year and next May.

There’s no doubt that this provides a more challenging environment for ADF property investors who rely on borrowing to finance their purchases. But stalling might also prove to be a poor decision. In the long-run, we believe that time-in-the-market far outweighs the efforts to ‘time-the-market’.

Long-term outlook

Looking a little further ahead, there’s an expectation that interest rates should decrease as inflationary pressures ease and economic growth stabilises. These lower interest rates will make borrowing more affordable for property investors, but the knock-on effect is that it’s also likely to create more competition in the market.

The probable scenario is that rates will remain steady until mid-2025, then gradually decline. Looking at RBA predictions, it’s expected that interest rates should be around 3.8% by mid-2026.

Interest rate implications for ADF property investors

We talk to ADF members every day who are considering property investment and are used to getting asked the question about interest rates – will they drop or keep increasing? And while it’s important to know what’s going on with inflation and interest rates, there are challenges and opportunities in every market. High-interest rates will absolutely increase the cost of borrowing, which will impact affordability and even potential returns. However, because overall demand is less, and competition lowers, they can also lead to more attractive property prices.

As Capital Properties owner, Marcus Westnedge says: “The current high-interest rates have created an unusual situation in the property market. Normally, we’d expect higher rates to cool demand and stabilise prices, but instead, we’ve seen a drop in listings as homeowners hold off on selling. This reduced supply has kept property values steady despite shrinking borrowing capacities. If interest rates begin to fall sooner than expected, as recent signs suggest, borrowing power could rebound, fuelling demand and competition. ADF buyers should stay flexible and ready to seize opportunities as market confidence strengthens.”

Strategies to make the most of the current Property Market

1. Evaluate investment strategies: Re-assess your investment strategy. Consider the potential for rental income and capital growth in a high-rate environment. If you would like some help looking at this objectively, the team at Capital Properties are here to help.
2. Be prepared: Make sure you’re in the best possible position to take advantage of the opportunities that present themselves. That means working through our Capital Properties “Property Investment Planner” and “Knowing what you need to qualify for a home loan.”
3. Stay informed: Stay informed about economic developments and interest rate forecasts so you can make timely decisions that meet your financial goals. We keep our “News” section of our website updated regularly and you’ll be the first to receive updates if you join our mailing letter and follow us on the socials. Just click on the following links for X (previously twitter), LinkedIn or Facebook.
4. Potential to lock in fixed rates: Given the uncertainty surrounding interest rates, locking in fixed rates for mortgages can provide stability and protect against future rate hikes. We’ve discussed what to do if you’re coming off a fixed rate this year in the blog post “Loan coming off a fixed rate this year? How to prepare.”

Consult with experts: Seek advice from financial advisors and property experts who can provide insights tailored to your circumstances. Yes, that means us. You can call on 1300 653 352, or email us at [email protected]

Keeping up with the latest news on interest rates – whether they’ll drop or keep increasing is critical for property investors. At Capital Properties we work with ADF members to help you make informed investment decisions to acquire long-term financial freedom through property investment. Find out more by exploring our FREE Capital Properties Discovery Session  and the Switched-On Strategy Series.