Kotim,
If interest rates are to get back to 7% the economy will have to improve pretty substantially. You would expect house prices will recover in line with the greater economy barring any unexpected altering of the Supply/Demand equation.
So while repayments will increase, homeowners should have increased equity in their homes aswell. It then just becomes a judgement call as to whether these will offset each other.
However, if people have overpaid now, they may not see the same increases in the equity in their homes. But that becomes a case by case issue.
Well thats my view on it anyway.
That's a good point that if interest rates rise, it means the economy is in better shape which means house prices will recover. That makes sense.
However the real issue as I see it will be all those FHBs who scrape into servicing a loan when they have 2 jobs and 5% interest rate. If they lose a job or interest rates are up to 7%, then we might see distressed sales. They may well pull equity out but a number of forced sales will reduce prices.
Plus really tough for the poor owners...
But you have to ask yourself who are all these "FHB scrapers" and how many are there? The average FHB mortgage is $280k. At 5% interest that's $1150/month (or $14k/year) to cover the interest bill. Not that much really for a couple/family and probably the same or even less than they might have been paying in rent anyway. Even on a single average wage of ~$60k, that's about 28% of take home pay, without accounting for middle class welfare benefits that such a family would be receiving (Family Tax Benefit A/B, dependent rebates etc etc).
If interest rates hit 7.5% (which as pointed out would likely mean the economy was in much better shape), the interest bill goes up to $1750/month ($21k/year), assuming no principle has been paid off at all (which is unlikely). So that's now about 40% of after tax single income. Getting tighter, but probably still doable for most. Many would earn above the average anyway or actually have 2 incomes making it a breeze still.
So only the "complete unemployment scenario" would be likely to produce a distressed sale. And for that to happen both partners would have to become long term unemployed. As discussed previously on the thread and in articles posted etc such as this one (http://www.businessspectator.com.au...ument&src=is&is=Property&blog=Concrete Detail) the likely and historical impact of this factor on the housing market is far less than expected by many. The reason it is misunderstood is most don't really understand how rising unemployment plays out socio-demographically speaking - we haven't really seen it here since the early 90s and most posters on internet forums weren't in the work-force at that time (I was).
Cheers,
Beej
That's a good point that if interest rates rise, it means the economy is in better shape which means house prices will recover. That makes sense.
However the real issue as I see it will be all those FHBs who scrape into servicing a loan when they have 2 jobs and 5% interest rate. If they lose a job or interest rates are up to 7%, then we might see distressed sales. They may well pull equity out but a number of forced sales will reduce prices.
Plus really tough for the poor owners...
netfleet
I am playing the violin for you now......a woeful, mourning, sorrowful tune
listen if one cannot afford to pay an average of 6.5-7% interest in normal times.....then forget about buying a house...
the ones who are buying at 5% are very lucky....
now the bleeding heart brigade were not around when rates went from 12-18% with in about 5 months..when I bought a house....so stop whinging at 5% or 7%
I was advised about a commercial loan last week...the lender uses an 8% rate to determine if you can service the loan....
oh and a huge amount of discretionary income left to play with....so forget about the $100 games, and huge mobile phone bills....nights out on the booze etc, and the credit cards
buying a house requires discipline...a little maturity etc...
Rising interest rates do not mean the economy is in good shape. This is a misnomer created by the lowering of interest rates to stimulate activity. And it is not working so where to from here. Money is losing value each day (the lists of why are endless) and it is becoming almost impossible for business people to borrow now for projects. This tells me that the only way out of this will be a rise in interest rates to entice the banks to lend for worthy activity.
good on you...if you look past the short term frame and think long term ...there are no worries...some suburbs do better than others....inner city are always better than the outer burbs....I gave an example of my first home cost $12,000 in a regional centre....now worth about 250k...compared to a friend who paid the same cost, same time in a nice suburb inner Melb....just a workers cottage in her case....the land alone now worth 1 million....4 times better..return....
so tell us where you are looking ?
While noting that central banks could make incorrect policy judgements, Mr Battellino said the high level of awareness about the risks of higher inflation should prevent this from happening.
"This [incorrect policy judgments] is always a possibility," he said.
"But, the high state of awareness that currently exists about the risk of being too slow to reverse recent exceptional measures should limit the probability of such a mistake being made."
Mr Battellino said the debate about global monetary policy was not surprising given central bank's around the world had made some unconventional moves.
Later this morning the RP Data-Rismark house price index for April will come out, along with a revised number for the March quarter. It is expected to show that prices, amazingly, increased more strongly than previously thought in the quarter, and actually accelerated in the month of April. Recession? What recession?
These figures are based on the largest database of home sales (60,000 in the first quarter) and the index is hedonic, which means it is more sophisticated than the median price data used by the ABS because it adjusts for the differences in houses.
In other words, when RP Data-Rismark report, as they will, that home values have increased in every capital city except Perth in the first four months of 2009, we can be fairly sure it’s true.
.....
There seem to be three key reasons for this astonishing difference (bear in mind that Australia’s share prices have fallen more than America’s): the Australian government’s first home buyers' grant, the underlying shortage of houses in Australia, and the healthier state of our banks.
.....
Will it be resolved by an improvement in business investment because of the global green shoots or by a housing downturn caused by rising unemployment, the end of first home-buyers grant and tighter home lending?
That, of course, is the big question. I suspect it will be the latter, but then two years ago, like many, I found the property bears' predictions of a house-price slump convincing. These arguments, for Australia at least, now look to be completely wrong.
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