Increase in Interest Rates - Expected Impact

For those interested in these stats......

Increase in interest rates Expected impact
+50bp If interest rates increased by 50 basis points then approximated a third (i.e. 1 in 3) of all households* will be under mortgage stress. 170 new postcodes become ‘mortgage stressed’.

+100bp If interest rates increased by 100 basis points (i.e. back to interest rates as they were in August 2013) then mortgage stress increases to 40% of all households*. Furthermore, mortgage stress in some postcodes such as Keilor in Victoria, North Fremantle in WA, Church Point in NSW and Buranda in Qld is expected to reach as many as 8 in 10 households*.

+200bp If interest rates increased by 200 basis points (i.e. back to interest rates as they were in June 2012) then it is estimated that 1 in 2 households will be mortgage stressed. In Sydney, virtually every household in Silverwater and Kurnell is forecast to be stressed, as is Fawkner in Melbourne’s north. Imagine that, people in every home with a mortgage are struggling to pay their bills!

+300bp If interest rates increased by 300 basis points (i.e. back to interest rates as they were in November 2011 then 9 in 10 metropolitan households* will be struggling to pay their bills.

+400bp If interest rates increased by 400 basis points (i.e. back to interest rates as they were in October 2008) they’d have returned to roughly their average over the past 20 years. Now nearly 2,000,000 households* are in mortgage stress. It’s a mainstream problem with 80% of the highest population postcodes affected.

+500bp If interest rates increased by 500 basis points (back to interest rates as they were in March 2008) there are forecast to be only 20 metro postcodes in the entire country not in mortgage stress. At the other extreme, 170 metro postcodes have at least 90% of households* in mortgage stress.
* households with a mortgage

 

Hmm... 1 in 3 is already under mortgage stress.

Are you in danger of defaulting in the next 12 months?

 

Imagine what would happen if they went above 17%

 

Been there, done that.

We bought our first IP with a loan interest rate of 16%! And P&I over 20 years, interest only was not a possibility. Take it or leave it were the options.
Marg

 

Considering we have $1T cash, some households would be more than happy

 

btw, if interest rate goes up too high... that stress would be temporary as high IR means high inflation, and high inflation means high wage growth and rent growth while the house price remains fixed at purchase date.

 

Didn’t the prices drop significantly then? So you were trying to pick the bottom of the market ?

 

Those rates were quite normal for the time.
Marg

 

Any change in interest rate must be towards 0% or we risk having a large scale recession, possibly a depression.

RBA didnt reduce the rates down to 0% when they had to and I strongly believe we need lower interest rates if we are to get the economy out of this mess at present.

 

That’s instane!!! Glad I couldn’t even read then. I assume you could buy a house for a price of pack of chips, otherwise how do you afford the payment?

 

Ummm. You seriously think that? So let’s get out of this mess by fuelling further speculation? Plus rates will go up as soon as fed rises the rates. When/I’d that happens it is irrelevant what RBA does. Banks need access to international bond markets and their cost base will driven by he largest bond market on the planet.

 

Growth at or a bit above 3%, inflation contained, unemployment near structural (at least in NSW), employment growth across the country, interest rates low, labor participation rate high points, budget nearing back to surplus, state budget in big surplus, biggest infrastructure program in NSW history, business confidence rising, non mining business investment picking up, etc.

Yes there are some downside indicators too, so its not exactly the definition of a boom.

Its all about perspective i guess, but i'd characterise it closer to 'It could be far far worse', than a 'mess'.

 

What made you think I may be joking?

Not really. Only a portion of Australian funds are sourced from overseas and therefore any increase overseas should have an impact appropriate to that portion.

Also remember IO investment loans are already being charged at much higher than P&I. The inflation is and has been very low. Thats indication enough that the rates should have remained lower than they are currently and if they increase the rates then, you guessed it, inflation will go even lower.

 

Most of what you have said is correct but the biggest indicator being inflation is still very low.

Thats partly because while we may have low unemployment, we do have high underemployment coupled with high costs of living.

The best litmus test on whether it was a good decision to not push the interest rates down to 0% or not is the current inflation rate.

You cant argue that they made a good decision if several years later the inflation is still very low.



Also dont forget while employment may be good in NSW, thats not the same in places like Perth, South Australia or even Brisbane. Whereas inflation and the resulting interest rates are a national decision. You cant have one interest rate in one state and then another in another state.

 

do you remember 18% interest rates.... OMBad

 

I doesn't matter. Zero interest rate means zero (or negative) interest rate for saving accounts which will trigger the $1T capital to go overseas.

Japan's experience of zero rate was negative. US implemented that when they had deflation, high unemployment and negative GDP growth. AU conditions are different, there is no ground for zero interest rate. That's actually basics... RBA knows well what they're doing.

 

Anyone over 60 will have vivid memories of that time.
But mindsets were different too. We had to save up a hefty deposit and then the aim in life was to pay off that mortgage. So we threw everything at it.
We survived!
Marg

 

I am in my fifties but yes remember it well

 

Oh if only economics were that simple. I think you are concentrating on only one variable. Central banks are already moving away from inflation as their main target because it has proven to be a horrible metric. Why? Because we live in a border less environment and capital moves around fairly easily.

Low interest rates means flight of capital to higher return areas. If Fed increases rates it will not only affect the portion of bond financing for banks, but will also increase this portion because capital will move from Australia overseas (think shares / purchase whatever, even retail investors move capital these days).

This is one of the reason why experience with negative or low rates have been negative so far.

 

I am not willing to get into a debate on this one but its enough to say that, RBA met yesterday and like many meetings before that, decided inflation is low, retail is struggling and therefore the rates are on hold.

You can turn google upside down and post as many stats as possible. If the economy was doing well, since 2009 that interest rates started going down and we are almost 10 years later, the official rate should have been much higher. BUT it isn't.

So rather than playing with words, posting stats and the such, lets focus on the decisions that were made some years ago and the results of it that is happening right now.