How Will Property Handle Rising Rates & Unemployment

I posted in the another thread that it looks like Australian property may have begun a positive upswing, but I'm personally not quite as sure and I just thought I'd bring the other side of the coin up for discussion - the likelihood that property will probably see a downturn in late 2009 and through 2010.

Australia’s Trade Gap Unexpectedly Narrows on Exports (Update2) - Bloomberg.com

I thought the above snippet was quite interesting, given that an increase in interest rates of 155 basis points would definitely dampen any housing price surge especially when coupled with the gloomy forecasts of unemployment getting into the 8% range by 2010.

What's your thought?

 

Firstly I think the Government's, RBA and your own forcasts, have proved to be far too gloomy thus far.
Asset prices in general are likely to inflate given the huge amounts government's around the world have injected into the financial system. If people see their super, share portfolios and property increasing in value they will be quite happy to accept a 1.5% rise in interest rates, especially the really smart one's who fixed their rates a couple of months ago. The increase in rates is likely to be slow and incremental, so I don't think it's likely to have a major impact on property values.

 

While the Governor of the RBA is saying that there's no rule saying he can't put up interest rates while unemployment is rising; I don't think he'd want to go that far.

However, if he does, there's going to be a lot of FHOG recipients who will be in a world of hurt. 1.55% will be around a 25% or greater interest bill.

Dave

 

Chris,
You raise interesting points that need scrutiny. I do not necessarily subscribe to the hurt by FHO if interest rate rise by 1.5% taking a mortgage rate to maybe 6.5% (if they are on a discounted rate now). Lenders have tightened policies significantly and now generally will only lend on a 90% LVR and requiring at least 5% genuine savings. Not all lenders but most. Their servicing calculators have tightened as well, often using an assessment rate of 8% or higher to show servicing of that loan.

There are more safeguards by lenders now than there were 2 years ago when you could get a 105% loan. Rising interest rates hurt all except savers. I hope many are using these times of low rates to increase their safety nets. Overall I would be surprised if the property market fell due to higher interest rates (at least if it is only in the order of 1.5%) as there should not be mass defaults. The areas I would be cautious of are the areas of outer suburbs, cheaper new land and house packages where FHO are buying in and the demographics are where they may be at risk of job loss, unskilled labour etc.