Confused and worried about Rates and property market?
As a mortgage broker and property investor I do understand the majority of people’s worries and confusion in current market conditions.
Although it is hard to explain what has happened or what is happening now and link between the two issues (interest Rates and the Boiling property prices) in a brief article, I would still like to touch on these issues because of their impotents on many people especially on our Arabic/middle eastern community who are in real need to learn more and more about these issues.
Why has the interest rate risen so many times?
Main
reasons are;
1- The Reserve bank raised the rate to slow
the inflation and on several occasions encouraged lenders to do so too, on
their own. Their purpose for controlling inflation within 2-3% range is to keep
demand and supply in balance, make
2- The cost of borrowing monies that are
lent by Banks/ lenders has risen because of a big part of the money invested in
properties was brought in by lenders from of shore and those funds have become
expensive mainly because of the sub-prime crises in USA, which has led to big
losses in capitals for many investors. The sharp decrease in property value in
3- The demand for loans or funds has increased because the price of properties has gone up and the need for more properties that need to be funded is increasing too because of population growth and new migration to the country. These factors have encouraged lenders to take advantage of these circumstances to maximize their profit by raising the rates.
What will happen to the rate?
As it looks, the rate has hit its peak, and
it is on its way to dropping. The sign for this is that all major banks have
dropped their fixed rate by about 0.50%, such as Westpac which dropped its rate
by about 1%, and the reserve bank has a desire to drop the official cash rate
most likely by 0.25% (some guessing by 0.5%). Normally banks would follow up,
although some banks like the Commonwealth bank of
What the experts are saying is that those rates will be dropping further within the next 12 months however will not drop as much as it has risen in the last 12 months.
Whether to fix or keep the rate variable?
Obviously it is impossible to give a specific advice to suit everyone’s circumstances since we all lead different lives. But generally speaking, the variable rate is a better option at the moment, since it is cheaper than the fixed rate and it is decreasing too. Another reason why many people may prefer the variable rate is the flexibility that comes with it.
For those who can only afford the fixed rate payment as it is and are not able to cope with any possible increase in rates, then a fixed rate maybe the way to go, despite the inflexibility that comes with it.
Another option is to have part of the loan fixed and another part variable. This will minimize the risk of an interest rise and give the borrowers the flexibility that comes with a variable rate and the benefit that may be achieved once rates start dropping.
The main drivers for interest rates are inflation, the growth in the economy and the demand for properties, both residential and commercial.
The property market?
Traditionally the property prices fall when the rate goes up, if there is an economic cycle which people experience. However, surprisingly the property prices have been increasing in the last 12 -18 months, despite the interest rate rise, due to 3 factors:
1- The huge shortage of properties both for leasing and for sale, due to strong immigration and growth in population. Australians need about 60,000 units urgently to accommodate for the shortage that the nation is experiencing and it is an economic factor that when demand is more than supply then prices go up.
2- The decline in the number of building approvals, due to the increase in building costs and the shortage of lands available for building.
3- The latest factor is the return of investors to invest in properties especially after the share market started to under perform and the rent yield increased.
What will happen to the property prices?
The statistics for the second quarter of 2008 show that the prices have slightly decreased by about 3% due to the increase in interest rate and the sub-prime market that occurred in the US which effected Europe and Australia slightly.
But as a whole picture, experts expect that property prices will be on the rise at least until the end of 2010.
Whether to buy now or later?
It is again a hard question to answer.
For
first home buyers it comes down to:
A - It all depends as to whether they can afford the high payments which normally are much higher than renting. The high monthly repayments are caused by the rising interest rates and generally high prices.
For example, if the purchase property price is $300 000 with a 97% loan = $291,000 over a 30 year term according to the current rate of 8.9%, the monthly repayments will be $2,320. Adding to that the council and water rates that a home owner is obligated to pay compared to a tenant who pays a maximum rent of $1,500 for the same and/or similar property to that of the purchaser with no further rates to pay.
B - It also comes down to the amount of deposit they can pay, will it be enough or not? Especially if the purchase price is too high and so the government grant only covers part of the fees and charges applied by the State revenue and banks.
For example: if a first home buyer is purchasing their first house for $300 000, in most cases they will need to come up with 5% deposit equivalent to $15 000 plus $5 000 which is the short fall (government fees and other charges about $10 000 - $15 000 First home owner grant). So that is a total of about $20 000, which isn’t as easy to save for many young families and couples in current living conditions.
For
second home buyers and investors it comes to:
1- Whether they can come up with all fees and charges since there is no FHOG to be utilized.
2- For investors whether they can afford to make payments for the short fall between rent received and payment made to lenders, and how long they are able to hold it off. Since we all know that investing in properties is a long term investment, the longer you hold onto a property, and the more you get out of it.
Statistics show that since 1946 property prices have, on average, doubled every 7 years compared to the wages which have doubled only every 12 years.
This format will bring us to a conclusion, the earlier we get into the property market as first home buyers or investors, the better since it is getting harder and harder.
A
little hint for
The two hot areas that have been
recommended by smart investor’s magazine are: North Coburg, and
Finally, I know it is really difficult to briefly explain the two issues that most people are concerned about and the link between the two in a humble article like this. Therefore please feel free to e-mail your enquiries to thamerkada@yahoo.com and I will do my best to reply to your e-mails within 24 hours
Finance broker.