When interest rates hit 8.5% will that start our first home owners sub-prime crash.

Ahh Wealth u are such a doomsayer!

D

My wife and I were paying 8.9% less than 18 months ago. I don't think rates going to 8.5% will have a major impact.

And Australia has hardly any sub-prime lending.

Hi ya Devo

They will go well above 7 %. Westpac and its Dragon offspring are giving 6.8 % term deposits for 12 months…….a clue me thinks. I'll guess circa 8 % and maybe slightly higher within the next 18 months or so.

Having said that, I don't think it will be the end of the world. I believe opportunity will be in the more leisurely pickings this coming year and maybe 2011. The frenzy of a very low interest rate environment and the FHO boosts and the "don't want to miss out" mentality will settle down.

I have posted a more balanced piece on my thoughts, however can't find the link now.

Found it…..here's the text:

There are markets within markets and sub-markets within them.

I don't see any further correction. Lower end with FHOG scaling back might soften or track sideways and then there is a case to be put forward that investors may pick up the slack.

The higher end took a hammering with the stock market bear market and has since bounced back…….at least it has around bayside Melbourne where I live.

As for the future, property has never ben afforable, particularly  if the prosepctive buyers have over-inflated expectations and must have it all now in exactly the location they wish to be, or they must have brand new McMansion with theatres and outdoor rooms lager than life. Many generations prior, people started out where they could and upgraded. So the instant gratifiers can either keep renting where they would like to live or buy somewhre else to get their foot in the door.

Westill have a 70 % owner occupier rate here in a generic sense. In the UK and other parts of Euope, it is as low as 40-50%…..hence many more tenants. This may occur here also.

Property is not only driven by investors, owner occupiers predominate and as it is a basic human need (and we are told that there is an under supply), I don't see the sky falling in.

I am not suggesting it's blue sky and everything is roses, however fundmentally, we are chugging along fine. If interest rates rise and some over-etended FHO struggle, then there will be some nice IP's to pick up.

I have read the book duckster refers to and the book title (The Great Depression Ahead) is far more bearish than its contents. Harry Dent does clarify that Austrlia is far better poised to emerge relatively scar free from the smoke and mirrors of the sub-pime mess and financial derivative products that were more akin to Ponzi. It is credit here (from that fallout) and ultimate development funds that are harder to source and yet we have a shortage of stock…………augurs well for upside to the suply and demand scenario me thinks

His book is however interesting as far as demographics and cycles specially for share markets (sectors) and also job cycles.

WJH, personally I cannot see a crash here in Australia………..perhaps softening in FHOG driven outer suburb fringes with little or no amenity that might see its purchasers struggle with rate rises whilst settling for a brand new (shiney) box and the obligatory high end Falcodores, and theatre systems whilst notching up plenty of credit card use. 

Not posting here as much these days, however I have been sounding like a broken record when I caveat that one needs to keep portfolio LVR's conservative moving forward. Now is not the time te be an uber-bull and max out LVR's and servicibility…….those days will come however not right now.

And here's the link to the thread it pertained to:

https://www.propertyinvesting.com/forums/property-investing/general-property/4329339

I'll put my hand up……………..I was investing back then. I fixed my rates on three IP's at 16.5 % and my mates thought I was nuts. I avoided the circa 20-21 % investment loans of the day.

I have always said that the worst possible thing to happen was the huge reduction in interest rates, combined with throwing free money at people to buy homes they couldn’t afford.

When combined with stupid lending practice from the banks, it is an accident waiting to happen. Just look at what was happening less than 2 months ago from NAB. http://www.news.com.au/money/property/first-home-buyers-urged-to-beat-rate-rise/story-e6frfmd0-1225791082144

They are happy to lend at least $450,000 to those with an income of $61,000. When interest rates hit 8.5%, interest only repayments on a $450k loan will be $38,250 with an after tax salary of only $48,000. Good luck trying to live on less than $200 per week, pay your rates, food, transport, power, water, clothes etc, let alone make any dent in the debt actually owed.

The scenario as it has played out was the worst possible for first home buyers, lured in at inflated prices, which increased by more than the additional grants and before they have even made their first payments, interest rates have already spiked by almost 1% and are sure to continue to increase.

Hi W4L,

I'm not old enough and I will never have enough experience! I am in no doubt of your intelligence. I have just seen a few of your posts and they seem to follow a similar line……..

I always see opportunity.

What do you make of general opinion (quantified by various market research) that most people are comfortable in their mortgages and are not feeling difficulty in paying? Many people are used to paying over and above the minimum payments. The will feel a pinch but not the full blow.

Yes there is tightening. There will be for sometime as the banks recoup many of their loses from USA. It will be like pertol prices.  Now $1.15 is considered cheap. People move on to other issues to complain about at their BBQS.

Interest rates are the next distraction for the masses. Watch this hand while I move my other hand behind my back and allow more foreign ownership of residential properties and put the squeeze on the property market.

Enjoy your day. I will go and look for those bargains you speak of.

 Please call me before the next "economic downturn" (I use "" because only two people I know lost their jobs and they were both accountants they didn't lose their house tho), I may choose to panic sell before the herd. I use the words "may" and "panic" very, very loosely.

And no I haven't read it. My current text is about commercial property investing. But I might get to it after that.

D

Hi Wealth, can you please share the options strategy that lead to $2M profit in 8 months from a small outlay?

This is a great blog and he predicts a severe crunch due to too much debt?? definitely worth a read and he updates quite frequently. not sure if it will happen but hemakes some damn good arguments… particularly because of the FHOG etc? I think it will hit home owners more than investors?

http://www.debtdeflation.com/blogs/2009/11/04/its-the-leverage-stupid/

He also predicted a 40% housing price drop by the end of 2009 and 15% unemployment. Even though Keen's predictions were way off, he blames the sever reduction in interest rates and government intervention instead of saying he just got it very wrong.

And as someone who is making predictions, couldn't he have seen that no government would let house prices drop by 40%? Surely govt's or the RBA were always going to intervene to steady house prices? Apparently reducing interest rates came as a shock to a professor of economics!

Isn't the entire point of your post that the bottom end could suffer the most if rates go up? But know you're saying it's always strong at the bottom?

The OVERALL housing market is up about 5% this year, not down 40% like Mr. Keen predicted. That is why he is walking to Mt Kosciusko. Sure, a couple of handpicked suburbs have fallen markedly from the peak, but this isn't indicative of the broader Australian market. Or are you one of those people who think that because something is happening in the Eastern suburbs of Sydney, it MUST be the same everywhere else?

Also, please provide me with some data that suburbs have fallen by 50%.

I'm not sure what you mean here, but First Home Owners make up less than 10% of the home buying market. Any talk of doom regarding first home owners affecting the broader market is overblown by doomsayers like Mr. Keen.

I'm too busy to do this. BUt are you telling me Airlie Beach is indicitive of the broader Australian market?

And W4L, perhaps you could be a little less preachy and critical of other people's views in future. Your shtick is wearing thin.

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