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The RBA's brave rates rise and what it means for housing

  • Tags: property investment, property trends
The Reserve Bank of Australia’s (RBA) decision to increase official interest rates by 25 basis points - to 3.25 per cent - has apparently driven the world gold price to a record high, sparking a $250 billion plus sharemarket rally on both sides of the Pacific as investors bet on the return of the resources boom.

As the first rates increase since March last year, and with Australia being the first country amongst developed nations to lift rates since the financial crisis struck, there has been predictable concern expressed about the impact on the property market. One newspaper went so far as to suggest a housing disaster loomed if rates were to rise.

Those suggesting a rush of home repossessions would do well to remember that only a third of Australian households have mortgages. Evidence shows the vast majority have used the downturn to bolster repayments, thus strengthening their positions. In fact, the margin that home loan borrowers were paying in excess of the official rate peaked at 2.7 percentage points in February this year.

In reality, the 25 basis points increase means an extra $46 per month on a $300,000 loan.
Inevitably, with interest rates now on the rise, borrowers will question whether now is the right time to lock-in using fixed interest loans. With the average fixed rate sitting at 7.14 per cent, the answer would appear to be, no.
Switching to a fixed rate now would result in an extra $351 per month on a $300,000 loan.

Canstar Cannex modelling suggests the variable rate would need to surpass 11 per cent by the beginning of 2012 to make up for the excess payments borrowers would be making in the early part of their loan period, if initiating a fixed rate mortgage now.

With variable rates remaining four per cent beneath where they were just over a year ago, Australians with an average mortgage are saving $700 a month – or reducing their principal by the same amount! If rates were to stay the same, that would result in a saving of $121,000 worth of interest over the term of the loan.
Nationally after seven years of virtual stagnation, one or two quarters of modest price growth are no cause to cry ‘bubble’. So, what’s next?

The little building activity taking place in the Australian marketplace is currently on land that has been long held and with old approvals. As this development is completed, a lot of it will not be replaced. There are few new sites being purchased because residential developers and builders struggle to get finance, even at present rates.
Applications for new developments have dwindled and consents are also a struggle. This guarantees that the pressure on housing supply - with record post WWII levels of immigration - will continue to force prices upwards and rents through the roof.
    The RBA's brave rates rise and what it means for housing
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