How will interest rate rises affect rental returns?

I'm 32 years old and I bought my first property in 2008 and it was literally the top of the rate cycle. Pretty sure the cash rate was 7.25%. Since then it's only been rate drops and I'm curious to know what happens to rent when interest rates increase.

Right now you are positively geared at 5% yield but obviously that will change as rates increase. I'd assume that a rate increase could lead the sale price decreasing, which if rents stay the same, actually represents an increase in yield based on sale price but what happens to existing property in your portfolio?

Are rent prices directly correlated to purchase price or is it linked in closer to the cost of ownership (repayments, holding costs, etc.)?

 

In essence, neither. It's linked to demand and supply for rental properties.

That being said, higher interest rates MAY constrict the ability to buy, thus forcing people to rent, and if supply doesn't keep up, rents may go up.

Right this moment, based upon fundamental/yield calcs, most of the capital cities are out of whack.

 

I'd assume that a rate increase could lead the sale price decreasing, which if rents stay the same, actually represents an increase in yield based on sale price but what happens to existing property in your portfolio
You have things arse about the factors that lead to rising house prices generally lead to higher interest rates. Poor economic conditions that lead to lower interest rates generally lead to lower house prices. Interest rates rise to stem rising house prices

 

If sale prices decrease and rates increase then it stands to reason that serviceability and market entry factors will remain fairly similar for most of the renting community. Meaning that it makes no difference to their ability to buy so demand for rent shouldn't change.

I'd also assume that if prices do drop then there's a chance that supply will be affected as developers halt projects.

If these factors do play out then wouldn't that mean that rent would rise despite purchase prices potentially dropping?

 

I would say the specific affect of rates on rent works something like this:

• Rates rise
• Less people purchase for investment and some sell off investments due to lower ROI after taking into account rental income
• Less investment properties available which means rental supply goes down
• In turn rental price goes up
  
  
• Then investors come back in due to higher ROI
• And the whole thing reverses
  
  
• Keeps swinging back and forth always readjusting

Important note:

• Lots of other factors also affect rent, such as greater and local economy (whether people can afford the higher rent), migration & population changes (this is a very big one), etc
• All of this takes time to filter through, it is not instant. I don't know how long but I imagine it can be long for things to adjust

But yes, basically higher rates will have an upward effect on average rent throughout the country as a whole eventually and I saw a graph of long term (30yr plus) aus-wide yields and it was correlated with rates.

 

Rent is basically dependent on supply and demand. Price your property above the going rate and you can expect much longer vacancies.

Rising costs affect landlords in many different ways. Not everyone is mortgaged up to the hilt, some IPs may even be paid off, so rising interest rates don't affect all landlords the same way.
Marg

 

Agreed, yields will be correlated with rates, however in the shorter term, Rent could be the same and property prices dropping with increased rates, causing yield to go up. Or rents could drop and property prices drop faster(due to investors exiting fast as rates rise), causing an increase in yields as well.

Hence having an increasing yield does not mean increasing rent, unless property prices are flat or going up.

In the longer term, rental prices will depend on what happens in the local economy.

 

As a general rule, I find that as rates go down, so do rents (due to less demand) and as rates go up, so do rents (due to greater demand).

Here is one example:- over nine years ago, we bought a block of four units. Today, rent are down around $6,000 pa for the whole block but, due to lower rates, our interest charges are down $30,000.

I hope that rates will stay down for a long time yet

 

I certainly don't want rate to go up but it would obviously be nice if rent went up to compensate. I'm never planning on putting myself in a position where an increase in rates would put me under huge stress but if rates did go back to 8%+ then I'd be sweating bullets.

 

As I understand it, rates are the tool used to keep inflation between 2-3%.
If economic growth is crap (like has been recently), then rates go down (which they have) to give people more money (from lower loan repayments) to try and get people to spend more money and increase spending to try and push the economy along.
If economic growth is moving too rapidly, rates go up to curb inflation.
So for rates to go up to 8%, I think the economy would be moving along quite well and in which case people can afford those rental increases which will be coming.
So it is not like you will have to make up the extra 3% interest indefinitely - only until it all adjusts. This might lag a couple of years (I made up that number as a possible bad but not horrendous case scenario), so you definitely should have a big fat buffer handy, but I don't think you have to worry about making up the extra 3% from your own cash for the next 5 years or anything crazy like that.

Also, when inflation is higher, your loan "value" (not dollar amount, the actual worth) will be reducing faster which is awesome. The thought of it makes me want to get up and start breakdancing.

Also people will be selling property during this time so as I understand it, you can find some great deals that will have a much higher chance of being CF+ even with the higher rates, without having to buy in toowoomba, so if the new property can be reasonably located for long term growth and still take care of the new higher loan interest repayments on their own, you have found the holy grail.

So it's not all bad - just make sure you have a big fat-albert sized buffer and all will be ok (provided the country doesn't end up in a recession).

Someone please correct me if/where I'm wrong - always happy to learn.