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Another MAY on interest rates

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    Yes, I had read reports that a rate cut is just as likely as a rate rise. See http://macrobusiness.com.au/2011/04/will-the-rba-cut/

     

    It is a dilemma, as whilst parts of the economy are booming (so they tell us), many indicators in the Australian economy are actually pointing downwards at the moment, such as house sales and the take-on of debt. Western Australia is officially in a recession.

     

    The risk of lowering interest rates is that house prices may stay at their current (unaffordable) high level. Hopefully the government won't be stupid enough to introduce another First Home Owner Grant Stimulus, but maybe they see an interest rate drop as an alternative way of propping up the housing market, which many vested interests (banks, real estate, builders and government) don't want to collapse.

     

    Despite the triumphalism over the high value of the Australian dollar, it is not a good thing for all sectors of the economy, so anything that makes the dollar less attractive (such as a lower interest rate) will hopefully stop it going too high. There are pros and cons to every interest rate move, which is probably why they've kept it steady recently.

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    Just stumbled on this really good article too...

     

    http://globaleconomicanalysis.blogspot.com/2011/04/australian-home-sales-sink-luxury-units.html

     

    At the end it says

     

    "Party is Now Officially Over

     

    Please pay attention to those struggling retailers. Australian retail sales will collapse once the housing bubble bust pick up more steam. That collapse in retail sales will crucify banks that made poor commercial real estate loans and it will bankrupt store owners who paid too much for their stores.

     

    Look for the Reserve Bank of Australia to cut rates. It will not matter when they do. It was one hall of a party Australia, but the party is now officially over."

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    Hopefully the government won't be stupid enough to introduce another First Home Owner Grant Stimulus, but maybe they see an interest rate drop as an alternative way of propping up the housing market, which many vested interests (banks, real estate, builders and government) don't want to collapse.

     

    I reckon homeowners have a vested interest too!

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    You took the words right out of my mouth Jim, what homeowner would want to see the price of their property fall.

     

    Falling house prices are only a problem if you want to cash in on your 'investment' soon.

     

    If you are planning to live in the house for the rest of your life, then there is no problem. It's a home, somewhere to live, not an investment, so what does it really matter what it's worth? If your home has gone up in value then so has everyone elses so you are no better off.

     

    If you are planning to move house, there is no problem, as the house you move to will also be cheaper. If yours has dropped 10% then the one you buy will also have dropped 10%. If you are moving to a more expensive home then you will actually be better off, for example sell $500k house buy $600K house. Both drop 10%, so now sell $450K house buy $540K house - you are actually $10K better off! Plus you get to live in the same house with a lower mortgage and paying less stamp duty.

     

    The vested interests want house prices to keep going up because they make more money. The government makes money out of stamp duty, banks and financial insititutions make money from home loans, real estate agents make more and more commission - it's the poor punters (homeowners) who are paying for all this.

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    Falling house prices are only a problem if you want to cash in on your 'investment' soon.

     

    If you are planning to live in the house for the rest of your life, then there is no problem. It's a home, somewhere to live, not an investment, so what does it really matter what it's worth? If your home has gone up in value then so has everyone elses so you are no better off.

     

    If you are planning to move house, there is no problem, as the house you move to will also be cheaper. If yours has dropped 10% then the one you buy will also have dropped 10%. If you are moving to a more expensive home then you will actually be better off, for example sell $500k house buy $600K house. Both drop 10%, so now sell $450K house buy $540K house - you are actually $10K better off! Plus you get to live in the same house with a lower mortgage and paying less stamp duty.

     

    The vested interests want house prices to keep going up because they make more money. The government makes money out of stamp duty, banks and financial insititutions make money from home loans, real estate agents make more and more commission - it's the poor punters (homeowners) who are paying for all this.

     

    For what it's worth - and I know you were responding to Andy rather than me - I was pointing out that homeowners themselves were conspicuously absent from your list of those with a vested interest, that's all.

     

    I understand the points you make, but the economics seem a little one-sided. If prices drop by 10% as in your examples, this is likely to be short-term and quickly recovered, and in the meantime many of the factors you mention come into play (although not in as clear cut a way - because gains and falls don't happen in such a uniform manner). However, if the drop is bigger, and sustained over a longer period, things aren't so simple. The reality is the majority of house buyers move a few times in their lives and do see their property as an investment; most purchases aren't made for the owner to live there until their dying day. Therefore, come the time of up/downsizing, nobody wants to be left with a mortgage higher than the value of their property (the ramifications of which none of your scenarios take into account).

     

    Jim

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    Therefore, come the time of up/downsizing, nobody wants to be left with a mortgage higher than the value of their property (the ramifications of which none of your scenarios take into account).

     

    Jim

     

    Point taken on negative equity.

     

    I myself was a victim of this when houses prices crashed in the late 80s/early 90s in the UK. I bought a flat with a 95% mortgage and eventually sold it 11 years later, and was still in negative equity!! Luckily the shortfall was only £4,000, which I paid off out of my savings, but buying that flat was a huge mistake financially - I would have been much better off renting throughout that period as at one point I was paying 13% interest on my mortgage repayments. Luckily I rented it out for a fair portion of the time I owned it so I wasn't 'stuck' living there.

     

    I reckon there are many first-time home owners in Australia at the moment who jumped into home ownership with the First Home Owners Grant Stimulus, bought at the top of the market, and are now facing the same prospect of negative equity. Provided they can make their loan repayments and ride it out until the market picks up again they are OK, but if they want to move on they will find things difficult.

     

    I think buyers need to be aware that house prices can fall (even in Australia - look at Queensland now) and if the market is looking dodgy (as it is now) then don't saddle yourself with a huge mortgage, so you have a buffer against potential negative equity. Responsible lenders should take this into account anyway, it was un-responsible lending in the USA that got that country into such a huge mess with sub-prime loans etc etc.

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