Rising cost of debt shakes up Oz property market
Australian interest rates rise again
Inflation woes in Australia have seen the central bank raise interest rates by one-quarter of a per cent to 7.0 per cent, which reports say could leave up to 40 per cent of Australian households in mortgage stress.
Governor of the Reserve Bank of Australia Glenn Stevens said on Tuesday that higher than expected inflation, above the target band of 2-3 per cent, had forced the bank’s hand in raising interest rates, and these inflationary pressures would likely persist to 2009.
What’s more, economists have suggested a hawkish statement released by the central bank has left the way open for a further rate rise next month, potentially taking the cash rate to 7.25 per cent, which would be the eleventh rise in a row.
The major lenders are currently offering rates on mortgages between 8.4 per cent and 9 per cent, and up to 10 per cent for no-deposit loans, and are likely to pass on this latest rate rise in the coming days. Several major banks lifted mortgage rates independently of the Reserve Bank earlier this year, after the credit crisis provoked by the sub-prime fall-out in the US led to a rising cost of debt.
While households will face a tightening of the family budget, there is a silver lining for astute investors willing to take advantage of the impending chaos.
Fire sale anticipated
A housing “stress-o-meter” compiled by JP Morgan and Fujitsu Consulting and released this week found 300,000 Australian households would be under mortgage stress with the latest rate rise - a situation so severe they could be forced to sell. Fujitsu’s Martin North said it was no longer just the lower-earning families that were bearing the brunt of rising mortgages, but now more affluent households were beginning to suffer as well.
This could shake out the property market and provide some good value buys after almost ten years of double-digit property growth in some parts of Australia’s capital cities. The current mortgage foreclosure rate is running at 0.2 per cent, but this could rise up to 0.6 per cent with the additional rate rises. And a much higher percentage of owners will sell before their lender forecloses.
Investors from overseas can take advantage of the sluggish Aussie dollar, currently just above 90 US cents, 46 pence and 61 euro cents, to make a foreign investment in Australian property, by utilising lower interest rates in their home country.
Rental demand remains very strong
Record low rental vacancy rates in Australia mean there is continuing demand for rental property, and a secure flow of income for investors.
Figures released Tuesday by the Real Estate Institute of NSW show the current vacancy rate is 1.2 per cent in Sydney, making this the eighteenth consecutive month that vacancy rates have dipped below 2 per cent.
Rents on apartments rose 5.2 per cent in Sydney in the last quarter of 2007, and house rents rose 3.91 per cent. REINSW cites a study showing house rents in Sydney could grow by 10-12 per cent this year.
Kevin Young of The Investors Club, which manages more than 10,000 rental properties across Australia, said strong demand for rental properties meant investors would be able to pass the increased cost along to the consumer. He said his group would be forced to raise rents by 10 per cent to cover the increased costs of the rate rise.
While the outlook is grim for owner-occupiers who are too highly geared, investors who can get into the market, and then pass the cost of debt on to renters while taking advantage of a low rental vacancy rate, will certainly be in a winning position.
