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A question about yields and interest rates?

Discussion in 'Property Market Economics' started by Beelzebub, 21st Aug, 2015.

  1. Beelzebub

    Beelzebub Well-Known Member

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    My understanding is that due to the magic of economics, if interest rates rise so to will yields. However, I'm wondering to what extent?

    For example, was it possible to buy cash flow positive property when rates were 18% in 1991? Could you get cash flow positive property just before the GFC when the banks were charging 8-9%?

    And importantly, if interest rates begin to rise soon, can we expect that rents will also rise while property values stagnate meaning cash-flow positive opportunities will still be available?

    Haven't seen a cycle yet, I'm just a noob

    Beelzebub
     
  2. FireDragon

    FireDragon Well-Known Member

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    I was still a teenager in 1991, but my parents told me commercial properties dropped a lot around that time (I think they said it was around half from the peak). The yield was around 18-20% for commercial properties.
     
  3. WattleIdo

    WattleIdo renovating Premium Member

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    While rents probably won't rise just because interest rates do, it is enevitable that at some point rents will rise and property prices will stagnate. Yes, this happens. I'm really looking forward to it.
    In order for this situation to gain full momentum, property has to be 'on the nose' - not fashionable like it is atm. That will require a chain of events such as interest rates rising (we can all see it coming) + poor yields + good activity in stocks & shares + other events which encourage renting over buying.
    The boom hasn't even stopped in Sydney yet. Seems to have slowed down in the last few weeks but then it's been winter so hard to tell. Rents are healthy there though. Have just increased mine again.
    Elsewhere, we're a little while off yet. Gotta remeber that it was only a few years ago that it was cheaper to buy than to rent in a LOT of places and it'll take a while to see the reverse.
     
    Last edited: 22nd Aug, 2015
  4. Beelzebub

    Beelzebub Well-Known Member

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    My understanding is that rents should rise because interest rate rises generally means that the growth of the Australian economy is pushing up wages and inflation. So it's not that interest rates cause rents to rise it's more that the underlying economic factors that would cause the RBA to put up rates would also put upward pressure on rental prices. This of course is the general rule and it may not happen this way.
     
  5. Azazel

    Azazel Well-Known Member

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    I'm a bit slow today, but why would yields rise if interest rates went up?
     
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  6. Beelzebub

    Beelzebub Well-Known Member

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    Well I'm no economist, but this is my understanding:
    • The RBA uses monetary policy to (a) keep inflation between 2-3% and (b) smooth out the economic cycle
    • They therefore use interest rates as a tool to slow economic growth or speed up economic growth (they want to slow growth to ensure inflation doesn't get out of hand)
    • If the economy is growing then pressure is put on wages. People get paid more
    • This extra income puts pressure on inflation. The price of things begin to rise
    • This includes rents
    • As a result the RBA raise rates to take money out of the economy and slow it down (More money is forced to go towards paying down debt and savings are encouraged)
    • Interest rates impact the affordability of housing more than any other asset class and so rate rises should stagnate prices.
    • So higher interest rates should to some extent mean higher yields.
    • Just someone posted earlier, they remember yields of 18% when interest rates were crazy in the 90s
    So I guess to clarify, interest rates and rents are a correlation and not a causation. Rents rise because of the same underlying factor that cause the RBA to raise rates.

    However, economics don't always work as a perfect model. That's why we ended up with stagflation in the 70s (high inflation with low economic growth which contradict each other according to economic models. i.e. low economic growth should limit inflation, which is why the RBA tries to lower growth when inflation gets out of its 2-3% goal)

    So, assuming my understanding of economics is correct, what I'm trying to get my head around is how this has worked in the real world. I would love to see some anecdotal data or even better hard historical data on median yields along with interest rates.

    For example what was the yield in say Ballarat or Mildura in 2006, before the GFC when rates were high?
     
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  7. WattleIdo

    WattleIdo renovating Premium Member

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    In other words, inflation. Which was between 3-5% for ages.
     
  8. Beelzebub

    Beelzebub Well-Known Member

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    Inflation at that range for ages would probably cause the RBA to put rates through the roof. I think 08 was the last time the consumer price index went above 4% last quarter the annual rate was 1.5%

    In any event, I didn't really want to argue the finer points of macro-economics.
     
  9. WattleIdo

    WattleIdo renovating Premium Member

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    Inflation and rent are virtually one and the same.