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On second thoughts, I think I’m going to have to pick apart the link provided by Ms Monopoly.
Even a cursory glance at Australian economic history provides ample proof of the link between inflation and interest rates. As you’ll see in Table 1, there is a trend between the two.
Basically, you can be sure that when the Governor of the Reserve Bank talks about raising interest rates, he’s worried that the market is overheating and inflation might be lurking around the corner. The Reserve Bank even points out on its Website, “major rises in interest rates in 1981/82, 1985 and 1988/89 … were designed to restrain inflationary boomsâ€.Yes, the RBA adjusts the interest rates ‘to restrain inflationary booms’ as quoted above, that is why there is the ‘ample proof of the link between inflation and interest rates’. However the article claims ‘when the Governor of the Reserve Bank talks about raising interest rates, he’s worried that the market is overheating’ without showing cause or correlation between interest rates and the housing market!
The first benefit is that because inflation makes things cost more — it leads to increases in the value of your property.
As inflation rises, so too does capital growth. The logic is that property is a hedge against inflation. In periods of high inflation, seasoned investors purchase real assets such as property.This is partly true, but for the wrong reasons. Inflation is good for appreciating asset investments because it erodes the cost of the debt. However, if inflation comes at a time when asset prices have risen to a ceiling where further price increases are unsustainable, inflating costs for other household expenditure coupled with rising interest rates is likely to lead to decreases in the value property.
Moreover, rising property values always push up rents over time as there is a direct correlation between the value of property and the rent it achieves.No, there is not a direct correlation between the value of the property and the rent it achieves! Why have rents only risen in line with inflation over a time when house prices have tripled? Because the correlation is between rent and inflation, not property prices!
If costs go up — in this case through a rise in interest rates — investors have every right — in fact, they have an obligation — to their financial well-being to pass on those additional costs.We’ve been through this over the last couple of days. There are many investors who have held property over the long term and are under no pressure (or ‘obligation to their financial well-being) to raise rents because interest rates rise.
As long as you aren’t overextended in the first place, the lag between the increase in holding cost, and the corresponding increase in rent to compensate should be manageable.So rents are about to double so that all properties will become “cash flow positive� I don’t think so!
Of course, this analysis is purposely conservative, examining the holding costs in the light of increasing interest rates while still keeping every other variable constant.I would suggest whoever wrote this piece of dross should crawl out of their own vested interest and try variables such as:
+ rising unemployment
+ falling GDP
+ debt constrained consumers / renters
+ declining stock markets
For starters.
Cheers, F.[cowboy2]Following on from my previous post and the interesting article above with regard to inflation & interest rates:
in·fla·tion
2. A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.Price inflation is in fact caused by an increase in available money, and the very obvious way that supply of Australian dollars has increased recently is via debt. It is important to understand that when money is borrowed from a bank or other lending institution, the bank does not actually remove money from depositors accounts and place it into the borrower’s account – the money is created on a fractional reserve basis. Keeping this in mind, the average level of household debt in Australia has risen from about 50% of after tax annual income in 1990 to over 140%!!!
For an interesting discussion on the effects of this type of inflation (from the US, but still very relevant or perhaps even more relevant? to us), the following links to an audio broadcast discussion:
Frank Barbera & Jim Puplava 03/05/2005
It may initially sound like it has nothing to do with the Australian housing market whatsoever, but believe me, it does.
Cheers, F.[cowboy2]
Hi unannounced,
We need to remember that the RBA acted to control pressures they felt may lead to inflation in the future. The impact on housing is not a major consideration at this stage.
So the answer to your questionIf the rate rises do not have the desired affect, what would happen then? A third increase?Is simply yes – whether house prices fall, plateau or rise!
Cheers, F.[cowboy2]Originally posted by Lizzy:If you purchase an investment you DO NOT RELINQUISH The FHOG. You can still purchase an owner occupied property and get the FHOG later, as long as you do not reside in the investment. READ THE WORDING ON THE APPLICATION – IT IS AS CLEAR AS DAY!!!!!!! (just so there is no confusion again regarding this matter…)
Yes, the application is poorly worded, but according to my reading of the First Home Owner Grant Act 2000, the application may well be disapproved:
11 Criterion 4—Applicant (or applicant’s partner) must not
have had relevant interest in residential property
(1) An applicant is ineligible if the applicant or the applicant’s partner
has, before 1 July 2000, held—
(a) a relevant interest in residential property in the ACT; or
(b) an interest in residential property in a State that is a relevant
interest under the corresponding law of the State.Am I wrong?
Cheers, F[cowboy2]JPD, That sounds very fair. Out of curiosity, would you lower the rent if CPI was negative for a whole 6 month review period?
Cheers, F.[cowboy2]It is a simple economic reality that if cost increase rent must increase.You seem to be ignoring the fact that most rental properties were bought before property prices reached excessive levels. The landlords holding these properties are not under pressure to raise rents as a result of the interest rate rises, and can therefore undercut the over-stretched speculators who bought at the market peak. Why would they? Because that’s all it takes to ensure 100% occupancy when there is a 2 – 5% vacancy rate.
Also worth noting is that many renters will be prepared to move to a smaller cheaper apartment / house if rents outstrip wage inflation.
It’s worth mentioning that I do believe the ratio of rent to house price will return to historic trend – just not in the way you expect it to Marc!Cheers, F.[cowboy2]
Originally posted by resiwealth:Experience tells me that there are some bargins coming, so what do you think???? … “some ones bad luck is some one elses good luck”
I agree Resiwealth.
It is important to remember that any bargains arising from a falling market will only be available to those with equity remaining. The banks will not rely on yesterday’s valuations when deciding whether to offer further debt to investors, and anyone with negative (or even nil) equity can kiss the deals goodbye! This is why I have been advocating lowering LVRs on property portfolios for some time.
Of course the hardest hit will be the MEW (for 4WD/Holiday/Renovation) suckers who will find themselves not only unable to purchase bargain properties, but also unable to move PPORs or even upgrade to a new car.
Cheers, F.[cowboy2]Originally posted by Deep_Pockets:you have nothing to lose, everything to gain. And if something does go wrong sell it and get your money back.
[blink]…
You are kidding of course?
F.[cowboy2]Interesting question!
Let’s see, the median Melbourne house price was $183,652 in 1989. Subtract 53%, adjust for inflation, that’s $154,572 dollars in 2004. That would require a 67% drop in real terms in 5 years. Even I’ll admit that is an unlikely scenario barring 70s style inflation in the high teens, and with growth slowing already… stagflation anyone?
I’m assuming the predictions in ‘Baby Boom, Baby Bust and the Housing Market’ were based on the theory that baby boomers were responsible for house prices breaking with the 3 to 5 times income trend which had held fairly true from the early 1900s through to the 1980s.Cheers, F.[cowboy2]
Well, that depends on what happens over the next 5 years![biggrin]
It’s interesting to note that numbers from the REIV show the real value of the median house in Melbourne fell by 24.4% between the time when that quote was written and 1996.
Anyway, I posted it for the graph on the previous page, not as an endorsement of that prediction!
Cheers, F.[cowboy2]Given that you are earning $80k, are DoubleIncomeNoKids, and your IP is roughly paying its way, could you not in 3 to 4 years either:
1) Pay down a large portion of your PPOR loan
2) Pay for the renovations out of savings
3) Both the above?However, if you believe that your IP is currently over-valued, you might consider selling it to take profits from the recent boom.
Cheers, F.[cowboy2]
I should point out that when you say ‘mine only’, it’s probably not!Thanks OSienna.
For the Australian perspective I think the following links should perhaps be re-posted too:
David Rees Commsec Presentation for the graph of house prices to wages on page 13 (extends to -100 years).Oliver’s Insight from AMP in particular the 04/06/04, 01/12/04 and 03/09/04 issues.
But how to measure the value of an asset / investment? I believe that immediate returns and the reasonable expectation of capital appreciation based on sound fundamentals are key. Those sound fundamentals in my opinion are the price/earnings ratio, population trends and general inflation.
Cheers, F.[cowboy2]
I think the following article contains valuable information about true house values, the factors that have lead to excessive house price inflation and what the future may hold:
Farlow ReportCheers, F.[cowboy2]
Ok, I caught the rerun last night. Not a bad show – the general theme seemed to be that credit cards are:
1) Bad for consumers
2) Good for creditors.
That would seem to be pretty much common sense. The part that surprised me was when the reporter pointed out that one card company makes more profit than Microsoft!On the subject of debit cards – I use a credit union for day to day expenses. No account keeping fees and a free chequebook & Visa card.
Cheers, F.[cowboy2]Originally posted by AUSPROP:those hoping for an interest rate induced property collpase may be disappointed:
Hi Ausprop,
Are you suggesting that the article you posted contains any good news or that a property collapse is innevitable regardless of interest rates?
Cheers, F.[cowboy2]Good luck Kayleen,
Be sure to keep us all updated (just add to this thread and it’ll come back to the top). I enjoy hearing people’s experiences as they unfold.
Cheers, F.[cowboy2]Thanks for the heads up, but sod it, the power has just gone out here on account of the wildest lightning storm I have ever seen.
Cheers, F.[cowboy]Whew! This has become more than a little circular! Anyway, I completely agree. Rents will soon cover mortgage payments (with maybe a little left over!)
Cheers, F.[cowboy2]Ah, yes. And he boasts of being a self made millionaire with $3,000,000 worth of cars in his garage! Wow, let me see, that’s… about 300 people paying $10k each. It’s easy to see where this guy’s money is coming from, and let me assure you it’s not all from being clever with investments.
Cheers, F.[cowboy2]Originally posted by Ibuycashflow:So, when you take away some of the investment properties and they become “homes” there will be a lower supply of rental properties available
And conversely a lower demand, as those houses are now homes to ex-renters.
Once again, if the flood of additional ‘investors’ didn’t have an impact on rents, why would an exodus?
Cheers, F.[cowboy2]
