What happens when interest rates rise?

From: Always Learning

Quick question?


Melbourne and Sydney markets have shown strong capital growth over the last few years. However housing affordability has been little affected (or gone down) despite this due to the downward trend in interests rates. At this point am I making sense? Are my assumptions reasonable?


Now here's my question: I don't know the figures, but has anyone got any numbers, or would like to guess on the issue of "what-if" or should I say "what-when" interest rates return to the 8 or 9% level. Can prices/values be supported (Melbourne, Sydney) by the general population when interest rates move up from there current historical lows?


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<td rowspan="4">



<td colspan="2" align="center">

<p align="left"> Investment Laws</td>



<td align="right" >1st Law:</td>

<td>"Whatever you don't invest you forfeit."</td>



<td align="right">2nd Law:</td>

<td>"Whatever you reap is what you've sown"</td>



<td> </td>

<td><p align="right">Jim Rohn;</td>


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Reply: 1
From: Paul Zagoridis

I've been accused of being very Zen. In a previous life I was an Economist and believed the cult of knowledge. This was an expensive lesson. (that's my long-winded way of saying predicting the future is almost impossible).

My comments are interspersed.

On 3/21/02 9:48:00 PM, Always Learning wrote:
>Quick question?

Long answer ;-)

>Melbourne and Sydney markets
>have shown strong capital
>growth over the last few
>years. However housing
>affordability has been little
>affected (or gone down)
>despite this due to the
>downward trend in interests
>rates. At this point am I
>making sense? Are my
>assumptions reasonable?

I think you have the cart before the horse. Capital growth has been driven by lower interest rates. Household spending on accommodation hasn't changed much. Therefore values have skyrocketed while rents have stayed flat.

Banks will lend so repayments are a maximum of 30% of household income. Prices fluctuate with affordability.

>Now here's my question: I
>don't know the figures, but
>has anyone got any numbers, or
>would like to guess on the
>issue of "what-if" or should I
>say "what-when" interest rates
>return to the 8 or 9% level.
>Can prices/values be supported
>(Melbourne, Sydney) by the
>general population when
>interest rates move up from
>there current historical lows?

Banks are now working their DSR on +2% (Rolf?). Downward potential for interest rates is almost 0. Upward potential is at least the fixed rate margin (better yet look at the prevailing bond rates). Save some time an follow the DSR model at +2%.

Will housing affordability is impacted by a 30% rise in rates from 7% to 9%? Can households afford to go from 30% of net income to service home loans to 40%+?

That is why I'm bearish on the long term sustainability of the current residential market. 15% p.a. price rises are only sustainable 3 out of 7-10 years per cycle.

But remember to deal with "what is" not "what should be". Economists can explain anything perfectly with hindsite. but they can't accurately predict the future.

So I try to have an exit strategy for most deals and don't gamble on capital growth to bail me out of negative cash-flow.

Interesting comparison -- The current malaise in the telecommunications industry. During the dot.bubble of rising valuations and negative cashflows, companies took on debt to purchase capacity. Now those companies have huge debt burdens, negative cash flow, no rising valuations, no capacity demand. stronger players are buying these near bankrupt companies and mothballing their capacity until demand improves post 2005.

There should be a correlation and many lessons there. My favourite is beware excess debt and maintain cash flow.

Paul Zag
The Oz Film Biz site is archived at...
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Reply: 1.1
From: Sim' Hampel

On 3/22/02 10:27:00 AM, Paul Zagoridis wrote:
>Economists can explain anything
>perfectly with hindsite.

"hindsite"... is that like knowing the location of your own backside, as opposed to "hindsight" which is the futile task of attempting to twist around and actually look at your own backside ? ;-)

Sorry... it's been a long week.

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Reply: 1.1.1
From: Owen .

I thought it may be the name of website that hasn't been updated since 1997 so when you visit it, it's like looking into the past.


"Gambling promises the poor what property performs for the rich – something for nothing"
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From: Sim' Hampel

Or it may be the name of a russian website which sells military helicopters ?

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