Strategies for property success as interest rates rise again

William Reynolds | B.Bus (L.Ec), FAPI CPV
Director Technical Services

Interest rates and property values

Interest rates have an effect on the cost and availability of funds to buy property, influencing both demand from buyers, and supply (vendors needing to sell).

While there is naturally a lot of conversation about interest rates because of the direct financial impact, in reality there are many other factors that affect property values.

Some of these other factors include:

  • Population (growth)

  • Employment/unemployment

  • Construction costs (the alternative of buying established property being building)

  • Wages/household income

  • Vacancy rates and rental growth

  • Zoning, subdivision and development potential

  • Gearing ratios (or the percentage of debt to values)

  • Yields/returns from other asset classes etc.

Over the long term in Australia, property values have increased significantly whilst interest rates have gone up and come down and gone back up again. Rising interest rates absolutely have an adverse effect on property prices (all other factors held constant), and conversely falling interest rates have a positive impact on property prices. This is probably more prevalent in investment property (especially commercial property) where yields for investment property are compared to the long term bond rate. A rise in the risk-free rate will increase the expectation of a higher yield for investment property, having a downward effect on the property value.

Some of the current commentary on the impact of interest rate rises (setting aside the combined effect of other issues such as cost of living pressures) therefore seems to overstate the impact of interest rates on property values. It also needs to be put into perspective – we have had extraordinarily low interest rates as a consequence of economic stimulus during COVID-19 in 2020. To put this into perspective, in 1990 (before a significant, deep recession which lasted from 1991 to 1994) the RBA official interest rate was 14.0%. Our current official interest rate (November 2023) is 4.35%.

Local vs national: how interest rate hikes affect property values differently

Because of the other factors which affect property values, the effect of interest rates on local property markets will differ.

First home or lower socio-economic areas may be more highly geared and hence more susceptible to the cost of rising interest rates.

Conversely, regional towns with strong growing local economies may be more effected by a shortage of housing stock, and so values are underpinned by higher rental returns.

In essence, local markets and different property sectors will not respond uniformly. Monitoring local market conditions remains a key focus of Opteon property valuers.


Strategies for protecting your real estate investments in a rising rate environment 
  1. Manage your gearing/debt ratios

Property buyers or owners with higher gearing ratios (or debt relative to the value of the property) are more susceptible to loan servicing affordability pressures when interest rates are rising.

Conservative gearing ratios are 30-40%; moderate gearing 40-60%; and high 60-100%.

Your gearing ratio should vary depending upon the property sector, for example higher gearing ratios on residential property are common whilst moderate gearing ratios are more appropriate for commercial property and more conservative gearing for lower income generating assets such as agricultural property.

If your gearing ratio is stretched, contemplate ways in which you could re-shape this, such as repaying debt, increasing loan repayments to get debt down over a shorter timeframe, refinancing on a more competitive interest rate, adding value (e.g. through renovating or rezoning) or, if really under stress - selling. Selling is a tough call, and broadly property is a long-term hold investment. If you do have to sell however, it may open opportunities for investing at lower gearing in another market.

If you need to manage your budget carefully, contemplate a fixed interest rate loan. Don’t gamble on interest rate trends as financial markets may prove to be more accurate and variable interest rates are currently expected to fall again in future years. But fixed interest rate loans can help you mitigate risks of interest rate rises in the short term and manage budgets.

  1. Rental Returns for Investment Property

Rental returns are a very important hedge to rising interest rates for property investment owners. If your rental returns can be increased this will offset the costs of rising interest rates.

If you haven’t increased your rent for some time, contact a local real estate agent, your property manager or our valuers to have a current market rent assessment undertaken. Work with your tenant to lift rents, in increments if needed to support your tenant.

Most rental markets are currently experiencing very low vacancy rates, generating high rental growth.

Don’t just limit your consideration to the gross rent from tenants. You should also look at your property expenses/outgoings and try to minimise expenses to increase your net rental returns. For example, ensure your insurance premiums are competitive.

Be mindful land, whilst representing a terrific tangible asset with long term capital growth potential, typically is not incoming producing and hence can be an expensive asset type with holding costs, especially during periods of rising interest costs.

  1. Add Value

Contemplate for each of your assets how you can add value. For a unit or a house this could be relatively inexpensive renovations (such as painting or gardening) whilst for other assets it could be considering subdivision or obtaining approvals for further development (eg a rear unit). For industrial and commercial investment property, managing your tenancy profile and increasing the weighted average lease expiry (WALE) by extending leases, confirming exercises of options, or finding stronger tenant profiles are important commercial property management considerations for protecting/increasing your property values.

  1. Diversify

The old saying ‘never put all your eggs in the one basket’ remains very true.

A good long term investment strategy is to diversify so you are less susceptible to economic or market changes/shocks for any one particular asset type.

Purchasing your initial property can be quite challenging in the present market. However, if you prioritise aspects such as advancing in your career, diligently paying off debts, and effectively managing financial risks, you may reach a point where you can engage in further diversified investments, resulting in substantial long-term returns.

If you are looking to buy your first home, the recent increases in interest rates may be good for you as the heat has come out of some markets and you may now find more choice of property on the market and better value.

If renting property, it is advisable to consider investing in alternative assets that require less capital. This will also help you save for a deposit or equity in a property in the future.

For investors, contemplate whether you have a good spread across other asset classes. Term deposits now offer higher returns with rising interest rates, or shares may start to represent value. Bonds should increase in value if interest rates turn and start to decline in future years. If you have residential property, contemplate adding a commercial property to your portfolio. Rising interest rates are likely to result in rising yields/returns from commercial property which may represent better buying opportunities than the last few years with record low interest rates. The agricultural sector has had an outstanding run for the last few years but with declining livestock prices and a potential dry spell with an El Nino weather pattern, you may start to see better buying opportunities in the short to medium term.

A diversified investment portfolio is to have some defensive assets, some growth assets, some high growth/higher risk assets and some fixed return assets (such as cash or term deposits).

If you need expert advice on some of these property considerations, feel free to make contact with Opteon and a professional valuer may be able to be of assistance. We can provide current market valuations (for considering refinance options), rental valuations, insurance estimates, contemplate opportunities to add value or provide pre-purchase valuations for diversifying your property portfolio.


William ReynoldsAuthor
William Reynolds
Director Technical Services
M: +61 408 400 678

This material is produced by Opteon Property Group Pty Ltd. It is intended to provide general information in summary form on valuation related topics, current at the time of first publication. The contents do not constitute advice and should not be relied upon as such. Formal advice should be sought in particular matters. Opteon’s valuers are qualified, experienced and certified to provide market value valuations of your property. Opteon does not provide accounting, specialist tax, investment or financial advice.
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