Although interest rates are currently very low, individuals need to take into account the possibility of a rate rise and the potential impact it might have on their investment strategies, an economist has said.
Speaking at the recent Australian Shareholders’ Association 2018 Conference in Sydney, Deloitte Access Economics director Chris Richardson told delegates evidence of an increase in wages around the world, albeit slowly, will lead to a rise in interest rates.
“You’re seeing it in the US, you’re seeing it in other economies too, and we would say that sometime in the first half of 2019 you will start to see it here in Australia,” Richardson said.
“So don’t forget the implications of that over time in your investment strategies.”
In light of this prediction, he advised individuals to consider their allocations to property versus shares.
“We’re now into what has been a very long phase, for different reasons, in which housing in Australia has looked to be priced ahead of its fundamentals,” he said.
“I’m not saying [that the market] falls over tomorrow, it absolutely won’t, but I would say that housing markets are probably more sensitive to the cost of capital, or interest rates, than share markets.
“Part of the reason why housing prices in Australia have never been at such records, relative to our incomes, is because interest rates have never been at such record lows.”
He admitted investing in residential property has been very rewarding for a long period of time, but pointed out people should begin to decrease their allocations to this asset class for this specific reason.
“I wouldn’t say that share markets are cheap, but equally I wouldn’t say they’re expensive either, or maybe they’re just inching into expensive territory. But in those big investment decisions faced by the average Australians, two-thirds of our wealth is in housing and a substantially smaller chunk of that directly and through superannuation is in shares,” he said.
“But if I had a dollar I wanted to invest, I’d be putting it in shares.”