What happens if rates keep rising?

As a tenant, I'm looking for a new rental and I must say I'm spoilt for choice. Lots of nice places have been on the market for ages and I get notifications for the same open inspection every weekend.

 

It really depends where you are in our vast country.

If you're looking in Collingwood / Fitzroy in Melbourne, not a chance.. you'd be fighting with 20 other couples and bidding $10 - $20 higher to secure a 2 bedder apartment.

Not sure about the Sydney market, but I daresay it's the same in some of the hotter pockets of inner city dwellings.

 

Except debt is significantly higher and incomes are not. A return to 7% will be catastrophic for many - especially those who have purchased in the last few years at 4% yields.

 

4% a lot in Sydney for at least 2 years or more would not have a hope in hell of that sort of return......lot have been buying on 2% expecting CG to go through the roof, you see em here on this forum, which tells me heaps more out there in every day land.

 

I don't think the RBA's Cash Rate will rise too far above 3%.

Cash Rate | RBA

The RBA meets once a month to discuss the cash interest rates.
It is at 1.5% now and is still at the lowest ever. To raise this to 3%, will require 6 x 0.25% raises.

Our economy isn't faring very well at the moment. If they raise rates, spending slows down, the economy slows down. Which is why the RBA has been very, very hesitant to raise rates. There are analysts who predict that the RBA would actually drop interest rates further to stimulate the economy, but many other analysts say the RBA are hesitant to do this as well, because of Sydney house prices, and to some extent, Melbourne. Dropping rates would feed the boom.

They are in a big pickle. The economy is languishing, on the other hand, RE market is booming. They are unable to touch interest rates, and have let it remain steady at 1.5%.

Of course, there are other variables that can raise Mortgage Rates.

1. APRA can force banks to keep more Tier 1 Capital to which will increase costs to the banks, who will then pass on the costs to the general Australian public via increasing mortgage rates.

2. US / EU raises their interest rates. Most of our banks obtain funding from overseas, so an increase in rates overseas also increases our banks' cost of funding, and again they pass on the costs to the general Australian public via increasing mortgage rates.

3. The government charging banks a levy (i.e. what happened to the new budget) increases the bank's costs, which will increase interest rates for mortgage holders.

However, I am of the opinion that interest rates are never going back above 7% anytime in the next 5 years. The Australian economy is so, so weak that it is unable to sustain high interest rates. We don't have the population like the US or China does to help keep the wheels of the economy turning. We don't have cheap labour like Asia to keep economic activity humming. Mortgage rates will only increase due to the 3 factors I mentioned above. All IMO.

 

No, it won't rise up.
But in fact, it has to go down next year to stimulate the economy.

 

There are 3 important parts to this, or more, but only #3 is relevant to us, and 3 will continue to climb at least this year.

1 RBA cash rate
2 Home occupiers rate
3 Investment rates

There is also business rates, card, cards etc etc

 

@dabbler yes, you are right. But I do not think it will rise up anymore. it is going to cause property crash when the investors dump their IP to the market.

 

Few problems there.

Rates for investors will def keep climbing, this is not due to RBA or anything they do, is internal and external forces.

Govt may be a little concerned about a crash, but the banks set the rates, govt pass on a levy, banks will pass this on somewhere, IO investors likely one of the targets.

APRA and Co does not have your financial welfare as a priority, basically, anyone who gets into trouble is on their own.

 

1. Possible when Basel 4 starts getting implemented.
2. US Fed on track to raise rates next week.
3. Going to happen as gov is scrambling to fill the big budget black hole.

and I'm gonna add
4. Loss of AAA rating causing increased funding costs. Recent downgrade by S&P rating agency for the smaller banks is just the start.
Property crash fears downgrade Australian banks | The New Daily

 

I don't think this is possible for Australia.
The economy will drop into recession (Australia | Economic Indicators).

 

So the fed has lifted rates, and expected to raise again this year..

When do the Aussie banks generally pass on those hikes?

 

The last time the US 10yr went up to 2.4% after the rate rise announcement last year IIRC our banks announced their rate rises pretty much in the following weeks.

This time round despite rate rise the US10yr bond has dropped to 2.16 from 2.4 a month or so ago(?? go figure)
And AUD 10yr has come down from 2.8 to 2.4%

So banks may not even do any rate rises. However they may use the impending bank levy as an excuse to increase rates again to pass on the cost to consumers. And they will also be increasing IO lending rates to try and "encourage" investors to switch to P&I loans.

Banks always win in the end.

 

Will be interesting to see how this plays out, unique situation