There seems to be alot of speculation of what will happen because of the rate rises.
Having read an article or two elsewhere*, there has been the suggestion that the current rate rise may have had little, or no affect at all. Which makes me wonder if the next rate rise may also have little affect as people know this has been coming.
If the rate rises do not have the desired affect, what would happen then? A third increase? Or is it more likely the articles are being selective in the data they present?
From what I have heard in this last week the half percent rise will have an effect. Not much on the general market but to the over committed (which is good for us). Some markets were about to show a recovery from last year but with this rise has softened that recovery. Their saying, if there is another half of a percent increase this will have an a more substantial effect with prices decreasing in most markets.
Guy.[smiling]
Originally posted by unannounced:There seems to be alot of speculation of what will happen because of the rate rises.
Having read an article or two elsewhere*, there has been the suggestion that the current rate rise may have had little, or no affect at all.
There will always be reports from either side of the fence. Here’s one from the Sydney Morning Herald that spins it the other way:
http://www.smh.com.au/text/articles/2005/03/05/1109958158858.htmlRate rise hurts but there may be worse to come
Date: March 6 2005By Hannah Edwards
The interest rate rise announced last week has had an immediate impact on the property market, with one agent fearing vendors have withdrawn properties from auction to avoid “public humiliation”.
Home Price Guide figures show yesterday’s auction clearance rate dropped to 47.9 per cent, down from the 54.1 per cent recorded the previous week. The number of properties withdrawn before auction rose from 22 to 34.
The midweek auction clearance rate also fell, plummeting to 35 per cent – significantly lower than the 46.4 per cent registered the week before.
Home Price Guide’s Louis Christopher said yesterday’s auctions were indicative of worse to come, particularly if the Reserve Bank raised interest rates again next month as predicted.
“So far the response to interest rate rises hasn’t been too positive,” Mr Christopher said.
“There is talk there could be another one [rate rise] and that’s the worry. If the RBA goes for another rise, and they have a history of consecutive rate rises, that could break the camel’s back.”
While house hunters may be faced with higher mortgage repayments, sellers are also feeling worried about the rise, John Greig Real Estate agent David Greig said.
He said that as soon as the rate rise was announced on Wednesday his phone started ringing with concerned vendors asking whether they should revise their sale strategies.
Mr Greig said that he had heard of one property that had been withdrawn from its scheduled Saturday auction and put on the private treaty market, a trend that increased in Sydney last week.
He said by doing this vendors were able to avoid the “public humiliation” of an unsuccessful auction.
“Vendors are very nervous and worried,” Mr Greig said. “The reality is that a quarter of a per cent won’t hurt anyone but it will give buyers an excuse to belt vendors harder again.”
The rise was a hot topic of conversation at the auction of a dilapidated house in Lilyfield in the inner west yesterday. The large crowd was made up mainly of bargain-hunting renovators, builders and developers who were keen to transform the home and sell it for a profit.
While some house hunters expected they would change their strategies in response to the rate rise, others took it in their stride.
“If you were buying the house to live in, the rate rises would be a killer,” house hunter Sean Holst said.
“But we have just started a renovate-for-profit business and we shouldn’t be too affected by interest rate rises because we only plan to pay a few months of the mortgage.”
After 29 bids the Californian bungalow on Joseph Street sold for $600,000, breaking its reserve by $100,000.
The part I find most true regardless of how borrowers will cope with the rate rise is the following:
“Vendors are very nervous and worried,” Mr Greig said. “The reality is that a quarter of a per cent won’t hurt anyone but it will give buyers an excuse to belt vendors harder again.”That about sums it up, in my opinion.
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]What if the latest interest rate increase doesn’t have the desired effect that the RBA wants? Well, it increases interest rates again……Whether it’s the latest rise or subsequent ones, they will have an effect.
It should also be noted that while the official line from the RBA is that the interest rate rise is due to potential inflationary pressures in the broader economy, Ian McFarlane (RBA Governer) did make comments in a Herald article a couple of weeks back that we have erperienced a wealth effect from passive increase in preoperty values, and it has not come about from productivity increases.
Therefore although the property market was not the official “cause” of the interest rate hike you can be sure that it is very much on the RBA’s radar.
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]
Love the “how do we get paid” page in this link…classic…[evilgrin]
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]And when looking at the unemployment figures dig a little deeper. Work 3 hours at award (ie slave) rate? You’re employed now. Nice one.
Your tenant is probably living pretty close to the poverty line as it is.
When Argentinia’s economy collapsed tenants stopped paying rent. Those who were kicked out stole the fittings. [buz2]
You definitely need to think about the motive of the messenger when reading media reports on the effects of rate rises.
For example, is a newspaper that’s highly dependent on advertising dollars from the real estate industry going to print articles that discourage people from buying real estate?
I don’t think so.
As for commentary from the various real estate institutes and individual agents, they’re trying to have a bob each way.
On the one hand they’re saying that the .25% rise was not warranted and is affecting sales (presumably in a futile bid to influence the RBA at its next meeting), and on the other hand they’re repeatedly reminding us that interest rates remain historically low so, as always, it’s a great time to buy.
Isn’t it interesting how spokespeople for the real estate industry don’t also remind us that the income to debt ratio of many households has never been higher?
cheers,
CarlinIf this rate rise (.25% … whoopee) doesn’t slow things down then there will be another. If that doesn’t work they’ll just keep on tacking on the interest…. either that or the Liberals/ Nationals will actually start to manage the economy for a change instead of riding a bubble.
Bring it on I say. The higher the rates the better.
I don’t think years and years of excellent leading economic growth can be dismissed as a bubble. Hopefully with the control that is at their fingertips they will have the iclination to push on with reforms such as tax reform to boost the economy further. Skilled migration is another area… throw the doors open and get this country moving!
http://www.megainvestments.com.auExtensive list of ‘Off The Plan’ property available for sale in Perth.
John – 0419 198 856
One of the side effects of a strong and sustained economic growth (not a bubble), is the reduction in the apetite by the incumbent government to further drive economic reforms.
From July 1 this year, they have their chance if they so choose, but a difficult one to push against what will be the very noisy forces that will line up against them. If not in the Parliament, at least in the public arena.
What if rate rises have no effect?If this measure is to believed, the rate rise may indeed have its desired effect!
Consumer Sentiment Index Crashes
Now all that remains to be seen is whether consumer demand follows confidence…I don’t think years and years of excellent leading economic growth can be dismissed as a bubble.…unless there was a significant correlation between GDP growth and household debt.
Domestic consumption funded by exponentially increasing consumer debt has been a major contributor to GDP over the last few years. Unfortunately, this unsustainable practise has lead to government complacency and delusion of the masses, not to mention a ballooning current account deficit.
On the positive side, at least the government is talking about using the budget surplus to shore up its unfunded pension liabilities. It seems rare these days for our elected representatives to look beyond their term. Next stop IR reform, then taxation! WOOHOO!
Cheers, F.[cowboy2] (who incidentally is not a Liberal Party voter).
I don’t see the role of government to be telling me how much I should or shouldn’t spend. You must give some credit to people to be able to manage their finances. Otherwise we could have inspectors from the government going around door knocking and making decisions as to whether you have been a bad boy and need to return the new plasma. I wonder which govt that would be? perhaps we could have a parliamentary enquiry into it, then a state leaders meeting. I am sure the local council would like to raise some revenue by charging a small fee just to ‘cover costs’ – perhaps an annual $150 fee to come and check out your house and garage to make sure there are no new cars or TV’s? Or under the libs that role could be completely outsourced – we could set up a high speed link that beams pictures back to an Indian control centre… then when infringements turn up and you try to question it, the lack of sense that you get will just result in you paying the fine out of sheer frustration. Yeh that’ll put the screws down on the current account deficit… who needs Keatings floating dollar – let’s peg back to the US – 1 for 1.
http://www.megainvestments.com.auExtensive list of ‘Off The Plan’ property available for sale in Perth.
John – 0419 198 856
Of course it’s not the role of government to control its constituents’ spending!
On the other hand, I don’t see anything wrong with the RBA raising interest rates as opposed to looking after those with credit card and mortgage debt at the expense of the all Australians & the economy.
I also wouldn’t have a problem with a government interested in raising financial literacy standards rather than leaving the lessons to ‘wealth building’ gurus who leave ordinary folk with nothing but debt at worst or a tax deductible ([angry2]) loss at best.
F.[cowboy2]Would it not be that part of the role of government is to provide a roof over everyone’s head? Property investors reduce the burden on the Government and therefore the burden on all Australians and the economy. My philosophy is property investors are providing a service.
The increase in property prices is not just from property investors (especially when they buy low cost housing to make their cashflows work). The demand is also coming from the “new rich”, families up grading their homes, second holiday homes or beach shacks, growth in population, the rise in single parent families (check out the latest survey on Australian women), immigration etc etc.
Interest rates are still the highest in the industrialised world:
– NZ 6.5%
– Aust 5.5%
– US 2.5%
– UK 4.75%
Putting rates up adds strength to the currency and hence, pressure on the sales and profitability of exporters. When you can’t sell the stuff you may as well cut the staff.With a strong currency, imported goods become cheaper. Less pressure on inflation from lower prices and better quality of living. Great??
However, somewhere along the line you have to pay for all these imported goods and that can only be done by exports – so, we go around in one big circle.
Interest rate rises have a somewhat delayed effect to housing. RBNZ have increased the OCR by 150 basis point over approx 18 months and we are only just seeing some signs of a slowdown. Part of this delay is attributed to the number of fixed rate loans and competition between banks.
Here are a couple of links to the Property Clocks and how the “time” can vary between geographical locations. It’s worthwhile taking note of the sequence of events
http://www.afsd.com.au/article/aip/aip32a.htm
http://www.joneslanglasalle.com/news/2003/08Aug/office_clock_Q2_2003.pdfCheers
JeffOh dear, one of my pet hates – the investment clock!
Why? Because every investment clock I have ever seen is either broken or has been broken! The very concept requires that the primary variable is time, with every event on the clock being intrinsically linked to a previous one…1) The London School of Economics ‘Economic Clock’ has events in this order:
+ Falling interest rates
+ Recession
+ Rising share prices
+ (Rising) real estate
+ Rising interest rates
+ Falling share pricesWhen what we’ve actually seen is:
+ Falling share prices
+ Falling interest rates
+ Rising real estate
+ Rising share prices
+ Rising interest rates
+ Falling house pricesSo where does that place us?
2) The European Property Clock
+This diagram illustrates where Jones Lang LaSalle estimates each prime office market is within its individual rental cycle as at end June 2003.
+ Markets can move around the clock at different speeds and directions.Given that the four positions on this clock are:
+ Rents falling
+ Rents bottoming out
+ Rental growth accelerating
+ Rental growth slowing
and the only direction options are forward & backward, how could any market move in a different direction?
ie:
+ Rental growth slowing
+ Rental growth accelerating
+ Rents bottoming out
+ Rents falling
and how could this possibly relate to the Australian rental market where rents only ever go up?Cheers, F.[cowboy2]
You must be logged in to reply to this topic. If you don't have an account, you can register here.
