Me think interest rate should come down

Back 20 plus years ago when a huge amount of Oz property was funded by local borrowings it was easier to bring it down like that. but if we are borrowing most of what goes into the mortagage market from overseas then how do we reset our rates below what countries like Ireland and Greece are borrowinng..

If demand drives up the cost of money the reserve can drive down its cash rate, and just become irrelevant.

over to others..

Sometimes I cynically (and humorously) think the RBA increased interest rates ONLY to combat the explosive housing market (under the guise of trying to control inflation) and bring more peace by cooling it down. They have certainly achieved that, at great cost to the retail sector of course. Edgy local retailers then go on to blame online retailers and Ebay for taking their business away and consider that buying things online is also tax evasion.

In reality, interest rates are not all that high at the moment, relative to the levels they have reached in the past. However, what is important is the level of interest rates that today's consumer can sustain. In this case, the answer is, 'Not a lot.' The strength of the AUD could be detrimental to the country. One of my Mum's friends runs a boarding facility for overseas students, and there's been difficulty trying to get a 'full house' of late.

And considering the strength of the AUD, I'd rather be holidaying overseas, or buying stuff online than buying from the shops here. Of course, the high AUD makes all expenses that much greater for those considering to migrate. And as ummester alluded to, the banks are not forced to follow the moves of the RBA. They have made housing even more expensive by slapping on a fraction more on the interest rates for mortgages.

Interestingly, I noted an increase in the 3 year fixed rate from Homeside initially (probably in Feb), rising from 7.2% to 7.45%, which was promptly again reduced to 7.29% in early March. The banker claims that the costs of funding had reduced, leading to a reduction in the fixed rates. This is rubbish, IMO. They reduced it perhaps because they didn't see interest rates rising much further in the next 12 months.

One thing's for sure though, it'd be funny if the high AUD ended up killing the economy!

Haha, the ol' house prices debate again, and you're mighty quick to jump into it.

In my opinion, it's simple really: raise interest rates too quickly against a backdrop of a recent GFC and global uncertainty (that is still ongoing) will dent consumer sentiment.

Let's be honest. While rates are only just considered 'average' right now, the rate rises hit homeowners hard and fast. Initially we were experiencing one rate rise a month. The frequency would have been frightening for a start, but when the banks started raising their rates out of sync with the RBA and slapping on super-sized rises, that really showed some people the things we're likely to face again in the future.

Homeowners, regardless of the size of their mortgage would be concerned that more rate rises are to come, and rightly so. So they buckle down, cut discretionary spending and put money towards their mortgages. On the other hand it is likely that renters will also be on edge. If the rate rises are hitting the landlords, the cost could be passed on in the form of a rent rise. Yes, they could choose to leave and find somewhere else to rent. But let's not forget that it's not as simple as packing everything into a backpack and leaving. A home is still a home, and people could lose their friends, the convenience of the location of their current place of residence, their kids may be forced to change schools…In general, moving for cheaper rent could also mean moving further away from the city, and everybody seems to crave being near the CBD.

There's this aquarium that I patronise, and it's been very quiet there of late, and in many other retail stores. I asked the friendly owner how business was and he said something of the lines of, 'Yeah, look, we've been a little quiet. This is what happens. Raise the rates a few times and people are spooked.'

I think it is simplistic to assume people stop spending simply because house prices are too high. But even if this assumption is right, it only confirms the value of home ownership in Australia: that people can, will (and should) make sacrifices to own a home. Food prices are high too. Meat is expensive. That never stopped people from throwing a Friday evening bar-b for their mates.

Might be a good thing actually. Spending in Australia may once again become trendy.

Now I don't want this to degenerate into a 'housing affordability' debate again. There's been heaps on this forum and I'm beginning to tire even responding to such topics, but…

No, to me at least, housing is not overvalued, particularly since I've been blessed enough to see how expensive they can be elsewhere. Housing is worth precisely as much as people are willing to pay for it.

When it comes to houses, there are two broad choices:

1. Buy
2. Don't buy. Rent.

As such, if an outer-suburban house costing say $500K looks overpriced to someone, he/ she can choose not to buy. Others however, may jump at the property and start negotiating a sale price. So, if you think housing is overpriced, don't buy! But you cannot tell people that it's 'overpriced' and tell people not to buy. Similarly, what worth is it for me to say housing is underpriced when I'm talking to a penniless family?

When people sell a house, they don't just slap a big price tag on a house for fun. They price it according to what they think it's worth, and then adjust that expectation based on what the market tells them. And when people slap a fat wallet down to buy a house, they don't pay a big price just for fun. They pay that amount because they believe it's worth that much.

To look at costs of living for Australians in this manner is to assume that all household forming units in Australia have a mortgage. Looking at the 2006 census for Melbourne, for example, 24.5% of private dwellings are rented. And if we put this information together with what you said…

Then there are three conclusions to be drawn:

1. A mortgage doesn't factor into the equation of 'costs of living' for a certain percentage of people in Australia, specifically those who rent.

2. If rents cannot be raised in accordance with rises in IRs, then rising IRs itself does not cause any strife to those who rent in Australia.

3. Increasing IRs alone does not increase the costs of living for renters.

So it is flawed to assume that rising interest rates increases the cost of living for everybody in Australia because house prices are 'too high'.

'Once bitten, twice shy.'

Common idiom, mate.

Let's also look to the above discussion about IRs and costs of living. I would like to suggest that something else besides 'high house prices' is dampening consumer sentiment.

Some clarification is necessary. Nowhere in my statement above did I say that rents would be increased by the same amount as a rise in home loan rates. This is one of the good reasons for renting. An interest rate rise hurts a homeowner more than a renter. However, a renter would be very wise to anticipate a rise in rent to some degree in the light of increasing interest rates.

Yes, I read those articles.

The articles on the Australian property market are always 'much of a muchness'. Depending on the state of affairs, the sentiment is the same and they seem to leech off each other.

Virtually every property crash in history has resulted in the voting out of the government at that time. As such, these big boys better keep their eyes on the prize, because it's their butt on the line too.

ok fword, you tell me what else is expensive?

I honestly can't think of much. Electronics are dirt cheap ATM. Cars are about what they have always been relative to income. Food and petrol may be rising but only returning to 2008 prices.

Granted, cigis, booze (tax) and insurance are costly but all of those things are very much a choice.

Relative to the rest of the world, Ozzies are paid an absolute shedload.

I just can't see any other item that is expensive relative to what I earn. Just in the last fortnight I have brought 2 computers, an 81cm TV and a guitar for one of my sons and they were all pretty cheap for what they are.

I am open to hearing what else is so expensive in this country ATM. I know it's cheaper to buy many things online but that is usually because you are avoiding the Australian wages or taxes that shopping locally incurs.

If IRs are still relatively low and consumer items other than houses are not overpriced, I just see it as a logical deduction working out what the expensive thing is.

Oh, I didn't think that the cost of living is increasing equally for everyone – it is increasing more for those with mortgages. Tenants on lower incomes would also be feeling it because rent is trying to keep up with house prices.

I don't think consumer 'sentiment' is actually dampened. I think people still want to spend – we have been brainwashed into thinking it is the purpose of our lives. I just don't think they can afford to because of current interest rates and lack of equity growth. But, I think the country needs IRs what they are now (or a little more) to be properous globally.

It's why our dollar is so high – possibly too high. All other western nations are stalling financially because house prices are returning to long term trends. Australia is currently keeping its high house prices and reasonable IRs in place – at the expense of Austrlaians being able to afford much else. On paper – we look great. The reality is that the average worker with a mortgage doesn't have much left over and without further debt creation thier purchasing power is crippled.

Like you said, it's only around 25% of people that rent and of those I'd wager the majority are lower wage earners. Renters who can afford to buy, like myself, are few and far between. Current rents are high for low wage earners. Those who have money to spend ATM are becoming a minority.

Older home owners who have little to no mortgage could afford to spend but they are likley preparing for retirement. Those already retired are starting to struggle.

I was refferring to equity purchases – I think they have made up a substantial amount of the larger non-housing transaction in Oz over the last decade. banks have let people spend willy nilly against the value of their houses and many people have done so – that is drying up.

The stock market is very reactive – up and down like a working girl on a good night:) It's the nature of the thing. the ebb and flow of housing markets are slower – though Australia's has been pretty up and down for the last 2-3 years (which, in stocks is a warning sign when it occurs faster than normal).

I have to have dinner – so sorry for the fast response. One thing though, the items you have noted as expensive (top tier gaming rigs, rolex etc) are the high end of their item class and should be expensive. Average to low end housing shouldn't be. Land in Australia is not in short supply – it's supply is just artificially restricted ATM.

The people who make thoughtless purchases against the value of their home are clearly giving the rest of homeowners a bad name. Equity in a house could be appropriately used for investment purposes, and even so, perhaps only to a point.

If I might argue however, the Australian property market has done this because of the global events that have occurred. It is these events that appear to be (at least in part) responsible for the apparent volatility in the share and property market.

Depends on how you see it. It could be argued that renting is the low end of housing as an 'item class', whereas buying a house is high end. Having a roof over your head is a necessity. It's a 'need'. Owning, or paying a loan off that said roof over your head on the other hand, is not a necessity. It's a 'want'. People 'want' to own a house. They don't 'need' to have one.

But to entertain the debate of the cost of 'average to low end housing', consider for a moment that you can buy a decent 3 bed/ 1 bath house on 600-700sqm of land that is 40-50 minutes train ride/ drive to the city and for little over $200K. Sometimes you can find a house below that price. That looks cheap to me.

BTW, in case people think I've got my head in the clouds (and can walk to work), yes, I do drive 50 minutes one way to get to work each day. To me, that's simply reality. It's worth noting, but not worth complaining about. I can either buy where I can afford, or rent where I want to be.

If you can't find affordable low end housing, you ain't looking in the right place. People also have the wrong idea as to what constitutes 'average' or 'low end' housing. People want a house that is affordable and yet nearly perfect for their wants (notice I said 'wants', not 'needs'). Sorry, but 'affordability' and 'perfection' are usually mutually exclusive.

So the government is to blame. And unless they start to release more land, the result is the same. We effectively have a shortage of supply. Can someone please shoo them and hurry them along to release more land? We're impatient to set this 'housing affordability' debate to rest.

Besides, even if the government were to release a gazillion hectares of land along the city's fringes, the vast majority of people will not like to live there because there is simply no infrastructure in place to support that degree of expansion. Is it possible that the government is restricting the supply of land because they know that they have no means to supply the necessary infrastructure and we'll end up creating little 'ghost towns' or throngs of angry homeowners complaining that their estate is becoming a ghetto, with not a single shop or even a post office in sight?

Not to mention that the vast majority of FHB will also be moaning, 'What?!! I'm NOT gonna live out there!!' Everybody wants to be near the darn CBD.

The problem perhaps then, is not really a shortage of affordable housing, but a shortage of affordable housing where people want to live. And in this regard, I cannot see how it's possible to resolve the problem. It comes down once again to supply and demand.

Haha, what can I say? I love a good debate. In my day-to-day job it is normal to cop all sorts of rubbish from cranky clients and be forced to take it like a strike to the chin. On this forum however, I get to engage in a no-holds-barred discussion, where I can honestly speak my mind.

However I am gradually wising up to the observation that people are not really interested in knowing where plentiful amounts of affordable housing exists. Rather, it has reached a point where it has become more important to debate about whether housing is overpriced or not, and discussing about issues that we cannot change. The end result of such discussions is becoming increasingly predictable.

1. A debate erupts between two or more parties as to whether housing is overpriced or not.
2. Each party starts to discuss the issues affecting house prices.
3. One or more parties discusses the hopeless situation of a FHB who is unable to afford anything.
4. One or more parties respond(s) by indicating existence of affordable housing, a point which is ignored.
5. The debate may circle back to point number 2, or otherwise resolve where opposing parties agree to disagree.

In my earlier post, I just dangled a fat carrot in front of everybody: truly affordable housing. Nobody has even bothered to bring that up for discussion, or ask where such housing can be bought. People are refusing to accept that $200K constitutes 'low end' housing. Instead they think of more popular outer suburban property costing even in excess of $400K and believe that should be 'low end'. I used to be like this, moaning about how I went to Uni for 5 years to become a 'doctor' and then still struggling to get into the 'lowest end' of the market. I was wrong. The 'lowest end' is not a $450K house with a massive backyard, two living areas and four-car carport. The 'lowest end' is $200K…and this IS a house. It's not some shack in a slum.

Although we believe the government's decisions have something to do with increasing house prices, we cannot hurry them along, and neither can we impress on them the brilliant ideas that we have.

It took a massive, prolonged drought to finally kick start plans for desalination (which lots of people still opposed). Imagine what it would take for them to do something about house prices. In that regard I think, there is great wisdom in that famous saying that advises us to accept the things we cannot change, and to have the strength to change the things we can. It is helpful to discuss how things can be better, but it eventually becomes pointless if we're not interested in finding a way around those problems.

So eventually these discussions always make us look like dogs chasing our own tails. Our 'tail' is always going to be there, lest we prefer to remove it by some painful means, if it's even possible. Mind you, I've seen plenty of real dogs chase their own tails and with no end in sight. I pity them. They have mental issues that require a specialist behaviourist to truly understand

Using that analogy, we can either choose to look away from our 'tail' and see the big picture, see how big the world really is and what opportunities exist, or we can continue to chase our 'tail' and imagine it's the only important thing in this world. Perhaps part of the human brain actually rewards people for having a sense of self-pity. It must feel good, that's why people continue to do it.

What you say is probably true. However we should also consider that again, even if the government did increase supply and did so dramatically, infrastructure would not be able to keep up. When I look at Melbourne for example, there is plenty more room for expansion, but even now we have some obvious issues: not enough water, brownouts and even full blackouts from time to time (especially when its warm and people start to put their airconditioners to work), frequent public transport glitches and ridiculously congested roads. Unless some forward planning is implemented, simple expansion at the urban fringes will kill our capital cities.

Agreed, and discussed numerous times in the past. But it's dawning on me that our thinking isn't going to have much effect on what the government chooses to do, at least in the short term. In the end I never hold my breath in an expectation that the government will do something to make my life 'easier' or 'better'. They are too busy defending themselves in parliament against the opposition, and in power for too short a time to make any real changes to our lives. There are some grave issues in politics as such, which is why I treat it with such apathy and disdain.

No, I don't know enough to say 'Australia is different'. Not that smart unfortunately. I only know enough to say that a housing price crash has yet to occur in Australia. A 'correction' however, has already occurred, but whether it has reached the bottom is something of debate. Naturally I presume you believe we have yet to see the worst of it. I on the other hand, can only say, 'I don't know when it will bottom out and when it will rebound.'

Of course, other intellectuals could probably give reasons why Australia is or is not different to other countries that have already experienced a crash, citing population growth, supply, demand etc.

Then I give up. This is bordering on ridiculous.

What good is it for well-meaning people to tell FHB where it's affordable to buy when they prefer to keep their blinkers on and look at all the stuff that is beyond their budget? In doing this they are simply green with envy. Not only do they fail to ever take a first step towards buying their home, but its destructively incapacitating. All they can think about are those lovely houses they cannot afford and they're not settling for anything less. I'm sure none of us who currently own cars do this. That is, we do not fall into a state of insisting that we should be able to afford say, an Audi (and its price needs to come down so that we can buy it), and we're simply not going to buy a Mazda, or a Suzuki.

Hey, I want an Audi too. An RS5 to be exact. My dream car. But since I can't afford it, I'm now happy with a Mazda 2. Point is: Get real. Buy what you can afford, or quit complaining and do something to build you up till you can afford it.

There's dozens of these kinds of affordable houses out there for sale right this moment. There is no need to queue for them. But people prefer to queue for something they cannot afford. What am I to do?

Why should this be the case? I don't believe house prices have to come down just so that people can finally afford to buy them.

I've written this before elsewhere, that I've wasted enough of my life worrying about what things should be. These days I accept the way things are and work on that basis. Likewise when I'm driving on the road and someone else falls asleep, cutting into my lane dangerously, I immediately employ evasive maneuvers and get out of the way. I don't just keep cruising along thinking to myself, 'This dude SHOULD keep to his lane!'

They do exist, I suppose. Try Coober Pedy, for example. Close to a source of income? Depends on what you do for a living up there. Ultimately, there is nothing forcing people to buy. They have a choice to rent, for the sake of getting a roof over their heads, and be close to major cities and a source of income in one fell swoop. In that regard, absolute rock bottom priced property doesn't 'need' to exist.

But perhaps to these people, 'close' is defined as being able to walk to work. Again we need to be realistic here. I used to think driving 50 minutes one way to get to work was far. Now I know it's reality, and I'm sure many other people travel longer distances than I do to get to work.

Again, goes back to the question of, 'Why should such property sell for under $300K?' Well, it doesn't, because people are still currently willing to pay more than $300K for such property, for whatever reasons those might be. It would be similarly ridiculous for me to waltz into a ritzy suburb and say, 'Sell your mansion to me for $150K!' Well, why should they sell it for such a price? When nobody wants to pay the price, AND the vendors are absolutely desperate to sell, then the price will fall. Needless to say however, it then looks like a Dutch auction where people hold their cards close to their chest, till they can't resist the price anymore.

But when buyers finally jump in, the herd follows, which drives prices up again. That's the cycle.

Alternatively, if nobody wants to pay the price, and yet nobody wants to sell, the price will simply stagnate.

The only things I've heard from GetUp were ridiculous propositions such as a FHB strike and a campaign to end negative gearing. These are not actions that are likely to solve the 'housing unaffordability' conundrum. Furthermore, I don't believe the campaigns even remotely aim to increase public awareness about the risk profile of Australian housing. I'm too cynical to believe in this sort of altruism.

The true aims of the campaign are probably, to either get the government to do something drastic to reduce house prices, or hope that enough homeowners will panic and put their houses through a fire sale so that all FHB can finally get on the boat and buy their dream home for a fraction of their current prices.

As do I. In my opinion, this is simply reality playing out. Life was never meant to be easy, not to mention buying a house, sometimes purported to be the largest purchase in a lifetime for the average Joe.

Indeed. Looking back in history it shows how high they really can go.

Very likely so.

Not entirely correct, IMO. We need to revisit the point about a certain percentage (24% or so) of Australian households being renters and without a mortgage. Furthermore, another some 30% of Australian households fully own their home with no mortgage on it whatsoever. Increasing IRs (whether house prices are high or low) doesn't sting them. In fact it generates more interest from their savings, which can then increase their spending power. The higher dollar makes our products more expensive for overseas buyers and can hence also affect the retail sector. Moreover, a strong currency reduces the urge from foreigners to study here, have a holiday, or set up a new life in Australia. All this slows the economy.

Both have a significant effect. The effect of high IRs I have already attempted to discuss (at least simplistically) above. High house prices in themselves does not affect Australia's exports, nor the tourism sector, and perhaps not even education. It does however, affect those who wish to migrate here, if buying a house is a priority for the said migrants. The latter can be a significant issue because a growing workforce can be beneficial for the economy, and fill the government's coffers, if I might add.

Another question to ask is perhaps, 'What's better for Australia? High house prices that accompany a thriving economy, or a housing market slump that indicates a country with deep-seated problems?'

I think we know which is better.