Theoretical Interest Rate Cuts Are Not a Solid Reason to Invest in Victoria
For those unfamiliar, the cash rate serves as the benchmark for interest rates across various financial sectors, including mortgages, business debt funding, and government bond issuance. Over the past 12 months, numerous articles from property experts have suggested that an imminent rate cut from the Reserve Bank of Australia (RBA) is the best reason to invest in Victorian property. After 20 years in financial markets, I remain skeptical of this rationale.
Interest rates influence the national economy as a whole. There is no state-specific cash rate, which raises the question: why would Victoria, in particular, benefit more from a rate cut than any other state? Let’s explore this claim in detail.
A Short Memory for Extraordinary Events
The last two cycles of significant interest rate cuts were emergency measures prompted by exceptional global crises.
- The Global Financial Crisis (2008):
Following the collapse of the U.S. housing market and subsequent global contagion, the RBA slashed rates by 420 basis points—from 7.25% to 3.00%—in less than eight months. These cuts were necessary to stave off the imminent collapse of the global financial system. Notably, Australia weathered this crisis relatively well, supported by its economic ties to China and decisive fiscal intervention. - The COVID-19 Pandemic (2020):
During the global pandemic, rates were cut from 1.50% to a historic low of 0.10% to prevent economic implosion.
These extraordinary events have conditioned some pundits to view significant rate cuts as routine rather than exceptional.
Speculating on Property Because of Interest Rates: A Risky Proposition
If your primary reason for investing in property is the anticipation of rate cuts, you’re essentially speculating. There are more efficient ways to express this view, such as trading interest rate futures or contracts for difference (CFDs). These instruments provide higher returns with significantly lower capital requirements than committing to a 30-year mortgage.
Property and Interest Rates: A Complex Relationship
The real link between interest rates and property prices lies in the Australian Prudential Regulatory Authority’s (APRA) serviceability tests. Currently, APRA mandates a buffer of 3.00% above the variable interest rate. Even if the cash rate falls, APRA can tighten serviceability requirements, negating any potential increase in borrowing capacity or demand for property.
Fundamentals Should Drive Investment Decisions
Investment decisions should always be grounded in fundamentals, both absolute and relative.
- Absolute Fundamentals:
The simplest metric is housing demand versus supply. Are there more households than available homes? For example, Sydney’s geographic constraints (national parks and the Great Dividing Range) limit housing supply, while Melbourne’s lack of such barriers allows for greater expansion. - Relative Fundamentals:
Government policy, including taxation and regulation, significantly impacts property investment. The contrast between Victoria and Queensland provides a clear example.
Regulation: A Tale of Two States
Victoria has the most stringent tenancy laws in Australia, heavily favoring tenants over property owners. Even the mandated terminology shift from “tenant” to “renter” and “landlord” to “rental provider” reflects a regulatory stance that discourages property investment. These policies foster adversarial relationships rather than encouraging collaboration.
In contrast, Queensland offers balanced tenancy laws that protect both parties’ rights and promote investment by fostering workable solutions to disputes.
Taxation: The Cost of Investing
Victoria’s taxation policies further disincentivize property investment.
- Payroll Taxes:
Victoria has introduced surcharges such as the “mental health and wellbeing levy” and the so-called “temporary” COVID-19 debt surcharge, which lasts 10 years. These measures discourage business investment, undermining the state’s economic growth. - Property Taxes:
Victorian property investors face land tax on properties valued above $50,000 ($25,000 for SMSFs), compared to Queensland’s much higher threshold of $600,000. Such disparities make Queensland a more attractive destination for property investment.
Victoria’s regulatory and taxation framework appears designed to suppress property price growth and limit long-term rental returns.
The Siren Song of Rate Cuts
Investing in Victoria—or any location—based solely on the prospect of rate cuts is a flawed strategy. Interest rates are a macroeconomic tool with nationwide effects.
The wiser approach is to evaluate the fundamental case for investment, focusing on supply-demand dynamics and broader policy settings. If your interest lies in speculating on interest rate movements, financial markets offer far more efficient and less risky avenues than property investment.
By adopting a fundamental and pragmatic approach, investors can better navigate the complexities of the property market and make more informed decisions.
