Rising interest rates have had a lot of people spooked in the past few weeks. Purse strings have suddenly gotten a lot tighter. You’ve probably read the headlines or even felt your mortgages go up and how that has affected the cost of goods.
In this article, we wanted to provide an explanation as to how Lion’s projects will and won’t be affected as a result of the increase in interest rates.
Whenever the cash rate is increased, the largest impact most Australians will feel is that their mortgage repayments will go up. The same is true for Lion’s projects.
But there are a few differences between a regular mortgage and the types of loans we have.
Most of the money we borrow is for construction. These loans are for quite large sums of money, but they are for a short timeframe—as short as possible.
Our loans also (generally) aren’t from banks. They are from private lenders and usually for a fixed interest rate. And the RBA’s targeted cash rate is not as important to a private lender as it would be to a Big 4 bank.
So will a rising cash rate, and subsequent interest rate rises affect Lion’s loans? Yes, but not as much as you’d think. Ultimately, higher loan repayments don’t really change anything. We already want to minimize a project’s interest repayments by being at peak debt for as short a time as possible. Rising interest rates are just an extra incentive to do so.
Property prices falling
Interest rates will most likely affect house prices to some extent, some projects more than others. As always, the catastrophizing in the media is making it seem a lot worse than it will actually be.
With our luxury stock we don’t expect to see that much of an effect: the prime property market has its own ebbs and flows that separate it from the rest of the market. Someone who has the wealth to drop $4 million+ on a home isn’t affected by the same factors as the average couple buying a family home.
Some of our older projects would be impacted, if not for two things:
- Firstly, depending on the city, house prices have grown 20-40% since the start of 2021. Even if house prices do drop, they’re still well up overall.
- And secondly, most of our high-volume townhouse projects have a high amount of presales locked in at prices higher than initially expected. So again, even if prices do drop, we’re still up.
Our projects have dealt with countless challenges over the last two years: such as the COVID-induced construction lockdowns. We’ve managed to overcome those challenges. We forecasted that interest rate increases were inevitable, so we had built in measures to counteract these rises.
And ultimately, the fact that the RBA is comfortable to remove these COVID “safety net” measures, such as low interest rates, is proof that they think the economy is in a strong enough position to handle it. To quote RBA Governor Phillip Lowe: “Today’s increase in interest rates by the Board is a further step in the withdrawal of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic. The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed.”
Rising interest rates will be a nuisance in the short-term, but a stronger economy will serve us better in the long term.