There has been plenty of commentary both positive and negative around the impact of falling interest rates and the lastest decision by the Reserve Bank to lower the cash rate to 1% will continue to polarise opinions. From those who have mortgages to those relying on interest on funds invested in interest-bearing investments such as term deposits, for every downward cut in the cash rate there will be winners and losers.
Where 5 years ago a saver could expect to earn in excess of 4% per annum on bank term deposits, that rate today is more likely to be under 2% per annum and looking further ahead, the forecast for more cuts to the cash rate will put additional downward pressure on those investment rates. In fact it will not be surprising to see term deposit rates close in on the annual rate of inflation which fell to 1.3 percent in the first quarter of 2019 below market expectations of 1.5 percent.
In a climate of falling bank term deposit rates investors often turn to real estate to achieve higher returns on their funds and in Ballarat we are experiencing increased activity from investors looking for the high returns from property. Our recent investment property sales show in the current market investors are happy to accept returns of around 6% on well leased commercial property. Generally these are nett returns as commercial tenants usually pay all outgoings associated with ownership such as rates, insurance and owners corporation fees. Some investors will consider properties with higher risk and higher returns which usually include properties with shorter lease terms or in secondary locations.
Apart from those who have cash to invest, the other benefit of a low interest rate environment is the ability to borrow money cheaply and to positively gear property. In other words if invesment money costs say 4.5% and you purchase a property with a return of 6.5% nett then you will create an income stream of 2% which in some cases subject to your ability to borrow, you may not even need to invest any money in to generate this income.