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What happens when interest rates start to rise?

Discussion in 'Commercial Property' started by RickProp, 21st Aug, 2015.

  1. RickProp

    RickProp Member

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    Hi all, I am very new to this but have been reading heaps of posts in the Commercial Property Forum on SS and here. There is some very useful information, so thanks to all contributors over the years, I hope I can help as well in the years to come.

    My background is resi in the UK, specifically HMOs or houses of multiple occupancy, it seems they are called Boarding or Rooming houses here but are classified as Commercial.

    I am looking to get into CIP in some shape or form, I am still deciding on strategy. I like the idea of rooming houses but they seem a lot dodgier here with short term tenants etc. Mine in the UK are on individual 12 month tenancies, are professionals working in London etc, like we all were at some stage starting out (I also stayed in a few before investing over there with mates).

    So, getting down to CIP here, I would like your views. Since interest rates are extremely low by historical standards, this has pushed up prices of RIP massively, that together with the foreign money coming in due to the exchange rate weakening. With CIP, cap rates seem to have been squeezed, inflating prices. I believe as interest rates come down foreign buyers also enter the Auz markets looking for yield etc. So, I presume the reverse will happen when rates start to rise, which they will at some stage. The US is looking at raising rates next month, UK early next year so I would imagine Auz will follow that assuming China does not tank.

    So what will happen when rates start to rise, assuming next year? Margins will be squeezed (unless fixed IRs for existing holdings) and demand reduced. Values would then reduce, cap rates increase etc (all else being equal). This will be until rents go up due to the improving economy but there will be a significant lag in timing and I would imagine values will be down for a period. Is it, therefore, a good time to be investing at the moment? I guess there will always be good deals, but I would imagine there will be far more when rates rise and values reduce.

    I am interested in hearing your thoughts on this, if you have been through a rising interest rate cycle, the effect on CIP values etc.
     
  2. lightbulbmoment

    lightbulbmoment Well-Known Member

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    People with large debts will get scared.
     
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  3. Ben Chifley

    Ben Chifley Well-Known Member

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    I'm old enough to remember the late 1980's with double-digit mortgage rates - I personally knew of several people who went under (too much debt, couldn't possibly keep servicing it) but you pick yourself up and get on with life after you go bankrupt or whatever.

    It's only money.
     
  4. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    There's plenty of predictions out there that suggest that we'll be seeing the current low rates for an extended period of time. It seems to me that the economists change their minds every 2-3 months, so I don't get too concerned about rising or falling rates

    Leading up to the GFC rates peaked at around 9-10%, the economy ground to a halt, borrowing money was near impossible for most people. With today's borrowing levels the same effect might occur sooner if rates do increase. Hence I don't know that we'll see anything higher than about 7-8% for a very long time.

    When rates do rise, people start to fix. The lock in their cash flow which mitigates the problem. Whilst this might mean that they pay too much if rates start to fall, it also buys them time to adjust their lifestyle, personal income or rental income to meet the higher repayments when the fixed rates expire.

    Also consider what it means if rates are rising. This would be a response to rising inflation, which tends to occur when the country is doing well economically. Salaries and rents also to tend increase even if the timing isn't simultaneous. Again, fixing buys the time to mitigate this problem.

    I can certainly see that there would be increased financial stress when rates do increase, but for most it's not then end of the world. If you make good investment decisions, this isn't the thing that's going to create a financial disaster. Most people come out the other side of it in an even better position.
     
  5. lightbulbmoment

    lightbulbmoment Well-Known Member

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    If you have a normal mortage and the ability to pay it off quick your fine no matter of a rate rise. Its the people who have greater than 500k mortage in syd or wherever who know there slaving for the next 30 years who will be scared.
     
  6. RickProp

    RickProp Member

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    Yes I agree, long term things sort themselves out generally. These days people are a lot more indebted, so small rate increases should filter down to slow things down pretty quickly.

    I have always believed it is time in the market rather than timing the market (excuse the cliche) as timing is very difficult to get right. I have bought at the top and bottom of cycles so I guess it all evens out. I do just worry about values decreasing when cap rates increase as the relationship between the two is very linked it seems, more so than for resi.
     
  7. citystar

    citystar Well-Known Member

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    I have made some of my best purchases during times when interest rates were rising for a variety of different reasons.

    I too remember my childhood when Mum and Dad were paying 18% interest on the home loan and it was tough. My Dad was a tradie and when interest rates are that high the construction industry came to a complete halt. It was tough for a very long time as blood began to slowly trickle back as the banks (RBA) began to lower interest rates. This is one of many reasons why I will always keep a healthy cash buffer because it would break my heart if I lost everything and had to start again from scratch.
     
  8. Ben Chifley

    Ben Chifley Well-Known Member

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    I disagree - you can always recover from going broke. Alan Bond did it. I read somewhere that one in four millionaires in the United States have sought bankruptcy protection at least once before. I know people who lost everything when Pyramid went broke (businesses, houses) and they generally managed to recover through hard work and perseverance.
     
  9. Biz

    Biz Well-Known Member

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    What happens when interest rates start to rise:

    [​IMG]
     
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  10. Azazel

    Azazel Well-Known Member

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    True. If the world turns to crap, there's not much you can do about it, grab a paddle and continue on.
     
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  11. Azazel

    Azazel Well-Known Member

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    That is our refinancing/mortgage story of this year!
     
  12. RickProp

    RickProp Member

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    That is the difference between the American attitude and the Auz/European attitude, we are all far more risk averse in general. There is certainly more of an attitude there "so what if I fail, I will just pick myself up and try again". They do have non-recourse lending though which is a big help and their banks were cleaver enough sell a lot of the dodgy sub-prime stuff to European banks. The yanks do also work pretty hard, they get like 5 days off a year (well maybe a very few more!)
     
  13. RickProp

    RickProp Member

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    Time to fix I take it!
     
  14. RickProp

    RickProp Member

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    I guess that is the question, sit on cash and wait for things to tumble or look to buy now as who knows if or when there will a correction. If I had a crystal ball....
     
  15. Azazel

    Azazel Well-Known Member

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    No way, not starting it all again!
    Refinancing, extracting equity, moving to another lender, IP's... all at the same fun time ;)
     
  16. larrylarry

    larrylarry Well-Known Member

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    @Biz you always post interesting and funny videos. Thumbs up.
     
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  17. Special order

    Special order Well-Known Member

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    Four to the floor I was sure
     
  18. Biz

    Biz Well-Known Member

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    I do like my gif's. :p
     
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