Interest rates increasing!

Sounds logical - rate rises are certainly a big trigger that can cause people to sell.

150 bps in a short time horizon is a big rise.

If OO's & the majority of mortgage holders move to 5.5% P&I rates it sounds plausible that many won't be able to afford repayments, forcing sales and liquidity into the property market. There's a risk of this happening too, especially if the economy in NSW runs hot, wages pick up, inflationary pressures rise, etc.

Agree with @euro73 - RBA have a fine balancing act ahead to manage this.

 

@Redom, although paraphrasing yourself for, one would suspect that if wages are rising that this may somewhat offset pain caused by rising interest rates.

Hmmm...or are you inferring that this is a ‘double speed economy trap’ where in this time NSW is the high speed economy and the mining states the laggards and interest rates used to ease the NSW economy causes pain in the other states?

 

Thats true - people will be more resilient to rate rises if wages grow.

Hypothesising, i assume if NSW unemployment keeps falling & wages begin rising, the RBA won't be able to sit still. Inflation will push up soon enough & they'll likely feel that they can raise rates with a bit more comfort. They may delay it to allow resilience to build.

Yes this will likely cause more pain & grief in some other markets where rate rises don't quite suit (WA i assume).

I dont necessarily think this means Sydney property prices will keep rising, but wages growing & a booming local economy rarely translates into price crashes or rapid price falls.

 

With all the positive economic news coming out lately it seems we may just ease into some nice ‘normal’ economic growth.

 

If you are buffer-less it could well be!

 

Curious as to what you would classify as a buffer... 6-12 months rent?

 

I think the christmas trading results will be very telling of the fragility of the economy and I can't imagine them being very inspiring from what I have read recently. I can't see the RBA raising rates unless their hand is absolutely forced by external factors which I wouldn't say is likely at this point. Jobless rate looks good but we are still a long way from healthy in respect to wage growth. Interesting article I read the other week from one of the economists of the big 4 saying it might be time to start looking at a policy around wage increases. "Given the usual economic fundamentals, like the unemployment rate, you would be expecting to see wages growth faster than it is right now. There's a market failure here, in a way, and governments are there to sort out market failures."

Read more: We need to talk about wage policy, says CBA's chief economist
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No way if wages pick up would it offset a sharp rise in market interest rates.

Households have never been so indebted and interest rates this low for so long that the balance is way out of whack.

As to double speed economy, absolutely. This is one hte things that facilitates different property cycles around the country at the same time.

 

Positive economic news is mainly due to increased immigration - that's the new normal

 

RBA aint raising interest rates anytime soon and I personally think they will go down to 1%

Hopefully they figure out how to increase wages in the next few years as the old tools are not working, just look at the rest of the world...

 

Households have record debt and record savings at the same time. How does a trillion dollars of cash savings fit into the equation?

Everyone wants to talk about the debt. No one wants to talk about the savings.

"Australians have also been squirrelling away a pile of liquid assets. Cash and deposits alone topped $1 trillion last quarter for the first time on record, having more than doubled over the preceding decade."​

Australians sitting on mountains of cash as wealth outpaces debt

Cash and deposits of $1 trillion is significant but no one has been able to articulate what the significance of that $1 trillion is.

My take is that it is unbalanced to discuss record household debt without also factoring in record household savings.

 

Well Japan has record debt and record savings as well and yet experiencing over 2 "lost decades" of economic stagnation. Could we end up with negative interest rates and similar picture?

Maybe not if we continue to grow our population. Unfortunately that would result in population stress on infrastructure and public gov services, which is pretty evident in Sydney.

Savings may create some safety when things go sideways, but its just money sitting there, which at low or negative interest rates, does nothing much for the consumer (consumer contributes more than 50% to our GDP) and may not keep up with inflation. What gov. wants is those savings taken out to contribute to the economy but if the general economy is not that good, consumers will be hesitant to spend.

To discuss household savings, the current observed trend is that savings ratio is on a sustained YoY downtrend.
Australia Household Saving Ratio | 1959-2017 | Data | Chart | Calendar

IMHO This is very likely due to households dipping into savings likely to pay for property investments("speculating"), hence contributing to the rise in household debt since the money coming from savings does not seem to be going to the retail/consumer sector. Flat income/wage growth means households are taking on more risk with this increased debt, especially in the case where there is a sudden shock to the economy.

It seems RBA is concerned about this and wants to stress test the banks again.
RBA to stress test banks as household debt remains a key concern

I reckon with the political climate in Canberra, our national / state debts are just gonna keep spiralling up, interest rate from RBA continue to be flat or down and asset prices to continue remaining high, increasing the wealth gap. Unless we are " lucky enough " to come into another mining boom, immigration is likely the only way to really keep the economy afloat, but that itself is a double sided sword.

 

An economy is a lot more than just household debt and household savings. What economic fundamentals were the same as Australia right now and what economic fundamentals were different to Australia right now compared to when Japan crashed? That will answer your question as to whether we could end up with negative interest rates and similar picture.

Any indications that the government wants to slow our population growth? Think of our economy and particularly tax system as a ponzi scheme. The government needs more and more population to prop up the system. Population stress on infrastructure and services is a given at this point IMO.

I think this is the real risk to the economy. If people are saving it means they are not spending. If people don't start spending then we risk sliding into recession.

Interesting data in that link. That data indicates that Consumer Confidence is up (last 101.35, previous 97.90) and Consumer Spending is up (last 243348m, previous 241693.00).

I would not have picked either of these. I would have said consumer confidence is down and consumer spending is down.

Consumer spending is up, which would partly account for a lower savings rate. We will have to see how consumer spending trends down or picks up over Christmas. Retailers are pessimistic about end of year trading at this point.

Something different between Australia and Japan is that the Japanese economic bubble included property and the share market. In Australia's case, the All Ordinaries was 6760 on 12 October 2017 and is 5968 today. That is more than a decade of lost growth, which on the face of it does not appear to be a trigger for 2 additional decades of lost growth. If the All Ords was at a record high, then maybe Australia would risk going the way of Japan. But with the All Ords at a lower value than 10 years ago, it is not accurate to compare our economic conditions to Japan when the Japanese economy crashed.

 

3 months of being jobless is a minimum buffer id aim for. So maybe $10-15k on an average salary

 

Oh really... I always thought it was a buffer for period of no tenant. But I guess loss of personal income is also needed to be factored in.

 

Different strokes for different folks. Losing my job is a bigger hit than a change of tenant for one property and paying an agents letting fee. Spent two months jobless once and having that buffer offered invalueable peace of mind.

 

Back on SS, I did a thread titled "The importance of a Buffer", in which I went into detail about a real life scenario that we lived through. All sorts of things came at the same time. No income for three months, an Agent embezzling, and a set of units that weren't renting.

 

@DowntownBlock. Do you see the differences between the two statements?

 

Much of the lack of gain in the ASX can be attributed to the higher dividend payout of the ASX compared to other bourses. The Accumulation index is at all time highs and I think surpassed the pre GFC high in 2014

 

Thank you for sharing Skater... but I feel extreme scenarios (like the one you have unfortunately gone through) are almost impossible to plan for.

My main reason for a buffer are:

• unexpected tenant vacancy (low likelihood given desirable locations of my IPs and historical vacancy periods being zero)
• expensive maintenance issues (low likelihood of anything >$2K p.a.)
• loss of personal income (medium likelihood but well and truly compensated with severance package that will see us through 1.5 - 2 years of unemployment (in the event I am unable to secure work).