If the RBA tries to keep pace with the Bank of England by raising interest rates again, it could be Australian home-owners who are left behind. "Higher interest rates are forcing people selling their homes to drop their prices while a rising number of home owners say their mortgage is worth more than their home, a new survey has found," according to Nick Bourlioufas at news.com.au.
Owing more than your house is worth on the market is not called "being upside down" for no reason. It makes everything you're told about home-buying look, feel, and most importantly BE profoundly nauseating, not to mention financially disastrous. "Over half the respondents, or 59 per cent, said the combined impact of three rate rises in 2006 had made it more difficult for them to make home loan repayments… Lower income earners were hit the hardest, with 71 per cent of those earning less than $75,000 struggling with mortgage repayments."
Wage inflation might help a bit. But it would also prompt the RBA to raise rates yet again. Either way, a real reckoning may finally have arrived for the Australian housing market, just as it appears to have arrived in America. The timing couldn't be more surprising for those who watch interest rates. After all, official central bank policies have not slowed down the rise of other financial assets one bit.
But official rate rises seem to affect the already-rich less than the would-be-rich home buying public. That's because raising the cost of borrowing hurts people who are already in debt the most. And it compounds the losing logic of financing your old buying habits with new borrowing ones. While it's true the rising rates are good for the Aussie dollar, which then attracts more foreign investment into Australian fixed-income products, it also makes exports more expensive. The strong dollar looks awfully good, but it may be the case that this kind of strength, it comes from higher interest rates, exposes the real weakness in the economy, the over-leveraged Australian housing market.
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
