Seems like interest rate maybe on the rise ?

Interesting article

AFR Article Time for RBA to lean against bubble

With increase likelihood of a March FED rate hike, if the RBA followed with a mid-yr hike, perhaps this would stop the Sydney/Melbourne boom?

What are people's thoughts on property trends later half of this yr?

 

IR rises historically take about 2 weeks for buyers to digest and move forward again. Even if IRs went up 2% they aren't even back to long term trend at 7%. It does not fix the supply problem which is a major factor in Sydney.

 

I believe it will most definitely impact on the markets, interest rate rises are a driver to changing market sentiment. We have also already seen banks increase interest rates regardless and tightening policy for investors and now also owner occupiers.

There is plenty of historical data/evidence that backs my opinions, when RBA interest rates start to rise it creates uncertainty, this will be the nail in the coffin. As was also documented by Corelogic in the latest property overview for 2017 where they stated a rise by RBA will change the markets.
Booms do not last forever, I think many people forget this as they get caught up in the frenzy of making money, and ignore the warning signs.

MTR

 

Another change in avatar MTR I liked the Madonna one .

Isn't raising the Interest rate a sign of the economy getting better other than just slowing down the booms in VIC and NSW? I must learn about this stuff

 

@Hodgo
Not necessary, in the case of FED raising rates it is a sign of the US economy getting better. Since Australian banks are foreign financed, increase US rate may put pressure on increasing AUS lending rates.
In the case of RBA raising rates, unless wage growth follows, same wage higher rates equals lower borrowing capability.

 

Agree with @MTR , rates will most definitely affect prices. Something i hear a lot is "my budget was $600,000, but we couldn't find anything so we went back to the bank and now our budget is $750,000". People are stretching beyond what is comfortable, and that is risky behaviour. IMO affordability limits are near enough reached, which is also why we are seeing more investor activity than owner occupier.

Less people buying will put more pressure on rents. Especially as rates rise, rental yields will need to close the gap against cost of debt, and there are 2 ways this can play out:

1. population growth tanks and housing goes into an overbuild. excess supply means house prices fall to bring rental yields in line (ie. Perth market 2015 to now)
2. population growth remains strong and prices hold relatively steady. Rents hike as there is increased competition among incoming migrants.

My speculation is that Sydney will lean more towards 1, Melbourne will be a mix of the two. My basis for this is no jobs growth in Sydney, and current population growth slower than melbourne with more dwelling completions in the pipeline.

Given that its just about certain rates will be going up, the figures I'm watching with more importance are jobs growth and migration, as these will advise if we are more likely to see scenario 1 or scenario 2.

 

Yellen has spoken, more or less confirmed the FED is on track for a rate rise this month and maybe many more to come this year.
Yellen Hints at More Aggressive Rate Path Upon Locking in March

Local banks should be raising rates again by April. Raising rates and apartment glut. #interesting times.

@JL1 : yes yields will have to fall within a certain range of the rates banks give since most housing is owned via mortgage. House prices might fall first and seem to bring yields up and at first, but soon affordability rises and people start owning as investors start dumping and moving to other assets. If there is abundant supply like is coming up with the massive apartment completions coming online this year, we are probably going to see prices drop , yields drop and widespread vacancies, especially if rates start ticking up.

 

So rates will likely increase via the banks, not the RBA?

For much of Australia it doesn't make sense that the RBA increase rates. Australia isn't Sydney/Melbourne, and to me it seems irresponsible to make national adjustments based based on isolated property markets/issues. That and property isn't the only thing borrowed money goes to.

Would it no make sense to implement policy that can better control property markets such as Sydney?

 

@Kangabanga in the next few weeks I'm going to post a little study on how over-rated the level of apartment over-supply in major cities is. I'm just waiting on the ABS release of population data for the Sep-16 quarter. Though i don't disagree with you, i think the vacancy rate will not reach quite what people expect

 

I wouldn't waste time with that, just wait till most of the completions start hitting after june in 2H17, possibly by September we'll start seeing apartment prices and rents moving downwards in a significant fashion.

@Spoony : Yup just like the banks increased fixed rates recently without any rate movement by the RBA. Back then the US 10YR yield spiked from around 1.8% to 2.4% thus increasing funding costs for local banks and hence the up to 60 basis points increase in rates depending on duration of the loan.

So banks are likely to just raise rates again (independent of the RBA) depending on how high the rate moves up from 2.4% (the US 10YR yield is just one of the many types of US treasuries sold, but generally if it goes up, yields on other types of treasuries will go up too.) And since our banks funding originate mostly from offshore, this rate rise immediately hits our banks funding costs.

US FED meets to decide on this rate rise mid march 14-15th. I expect our banks will start announcing rate rises once that is confirmed, very possibly by another 50-60 basis points depending on there the 10YR ends up at.

And this interest rate rises will hit other sectors, not just property. But i reckon property will be hardest hit as its the majority of loans our banks hold.

gov. could probably do more to reign in the proprety boom in Sydney/Melbs, but they are also the same guys enjoying all the stamp duty moolah, so their hands are tied so to speak.

 

How is looking at actual development statistics a waste of time when judging level of overbuild?

 

I agree that RBA shouldn't adjust their policies based on Melb/Syd property, however reading their statements they seem to be pretty concerned about it (repeatedly mentioning property price in multiple past statements) which gave me the feeling that's what they would be doing ie raising rates to cool property price. It was the same logic why they didn't lowered the rates further last yr, "lowering rates might further encourage property price" was their statement I believe.

@Kangabanga I agree that FED rate rise would def. affect mortgage rate in Australia, if FED raised rates 2-3 times this yr, we could see mortgage rates in Oz go up by as much as 1%. If that happens I recon a lot of people will be feeling the pain. Maybe not people on this forum but First home buyers and the general FOMO crowd.

 

I just came across this article.
Owners who leave homes vacant will face a tax slug as Victoria acts to increase housing affordability
[At least 24,000 properties were "demonstrably unoccupied" in Melbourne in 2014, according to a study conducted by Prosper Australia. However, the study suggested the number of empty properties might be much higher based on an examination of water use. ]

Sure go ahead and do your numbers and let us know ;P Though we all know there is going to be a massive overbuild. Does the level of overbuild really matter??

It seems the government has already done theirs and is coming up with so many vacant units they've finally put in a vacancy tax. Pretty sure these will add to the apartment glut.

Also this article from last year shows :
ANZ Bank's Shayne Elliott warns on overbuilding in apartment market

 

Bear in mind apartments are subset of the overall market. This overbuild is coupled with an underbuild of other types of housing

 

Rates are on their way up.

 

I do believe our RBA will raise our interest rate but it will probably by the end of 2017 given our slowly improving economy.

Don't get yourself confused with all the recent bank rate increase. That is to do with their control of investment loan book growth more than anything else. It is also a good opportunity for the big 4s to recope some revenue from their previous aggressive discounts!

 

US10YR is almost 2.6% now. Doesn't matter what rates RBA puts out soon, banks should be planning to increase their rates when FED moves this week.

Iron ore is also on a downtrend now. AUD will be going down again.

 

lol

 

So how many of you guys are locking in your rates and for how long? I have talked to my bank and @ $1.9M if I locked them in for 2 years we would pay $40pw less or 3 years $11 pw less. Not that I'm trying to decrease my weekly expense (but everything helps) but more to protect me from future rises.

Talking to my real estate agents they are thinking that the markets (where my properties are) "should" turn for the better, around in the next year or so. Just their opinion of course. So if the market turns in a year would I be better off locking in for 2 or 3 years?

 

If the RBA starts to increase rates I think there would definitely be a pause in the market. There's a lot of investors who are behaving speculatively and have never seen a rate increase.

It is somewhat ironic that for many lenders, increasing rates will actually improve their serviceability calculators - people would be able to borrow more (to a point). There's two parts to this...

Firstly, lenders use assessment rates to determine borrowing capacity. These assessment rates are often flagged as about 1.5% above the actual rate people pay. Assessment rates also have a 'floor rate', or a minimum value which they can be. Right now assessment rates are as much as 3% higher than what people are actually paying. This means that even if rates increase by 1%, there won't be any increase to the assessment rate and thus serviceability calculators won't be adversely affected.

Secondly when calculating negative gearing, most lenders use the actual rate the borrow pays. Thus as rates increase, so does their negative gearing benefit in the banks calculators. This puts more money into the calculator and serviceability increases.

Thus for investors wanting to borrow more, paying higher interest rates is often a benefit!


Coincidently I've locked in a significant portion of my loans. Over the next 3-5 years, I figure I'll be ahead overall, but even if rates don't increase, they're so low right now it's hard to imagine that there's much to loose.

The properties whose loans I haven't fixed are those where I intend to do something with during the next few years. If you anticipate selling or refinancing, best not to fix.