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Improved FHOG + low Interest rate = Trouble?

Discussion in 'Real Estate' started by Young Gun, 2nd Dec, 2008.

  1. Young Gun

    Young Gun Guest

    Does anyone else think the current interest rates (which are becoming less and less by the day) and the new and improved FHOG are potentially creating trouble for the housing market in 3-5 years time??

    Look back at what happened in the US after their last recession in 2001. They cut interest rates dramatically from about 6.5% to 1% within the space of about 2 years. This kick started their economy and created the housing boom that lead to the credit crisis we are experiencing now.

    Basically if you had borrowed in the US in 2003 and fixed your loan for 3 years, when they came due to be fixed again your mortgage repayments would have increased by x5!!!!

    So imagine if you purchased a house today that you could just afford (as everyone was saying it’s the best time to buy, housing always goes up, if you don’t get in now you’ll miss out etc, etc), used your FHOG as your deposit & locked in a mortgage at today’s rates (NAB’s offering an introductory rate of 4.99%!). Then fast forward 3 – 5 years where interest rates are back where they were at close to 10%. Your repayments are going to be 50% – 100% higher.

    If you think we have mortgage stress now just wait till 2012 -2013. People have short memories they’ll forget that interest rates can be higher and will borrow up what they can afford today, not what they can afford in 5 years time. We might miss a major housing correction here now, but it will happen eventually.
     

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  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I think one limiting factor that has not been present before (at least not in the recent past) is the strict lending criteria now in place - it is much more difficult to get a loan than it was 6 - 12 months ago.

    The days of easy credit are over (for now), and I think it will take a few years for the credit system to loosen up.
     
  3. C3PO

    C3PO Well-Known Member

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    Personally I am waiting for one or two more interest rate cuts and then I'm going to fix the whole lot for as long as I can. Already sniffing around for a good lender with a fixed offset home loan account (any recommendations anyone?).

    We may well miss the housing correction now, but I agree there is every chance it will happen in the future.

    I'm pleased with the rate cut but I do think the RBA is making a mistake by cutting rates so dramatically, just as they made a mistake by raising rates so much earlier this year. It does nothing for confidence in the economy, and we clearly have a government that is too scared to tell us we are heading for recession.

    It highlights to me that moving the cash rate around really is a blunt instrument means of stimulating the economy.
     
  4. Jacque

    Jacque Team InvestEd

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    The RBA is cutting rates to stimulate spending- not just on property but on spending generally. It helps not only mortgage holders, but small businesses, big businesses and consumer confidence as well.

    Agree that people have short memories (and let's add selective to that description) but ultimately property investors are wiser, having lived through the last boom which, according to some, was a real anomaly and unlikely to be followed again as rapidly or as quickly in the short amount of time that the market took to almost effectively double in prices.

    Resellers from 03-04 are still suffering losses (at least here in Sydney) which I believe has made them almost "property-shy" in some respects. I've come across a few people who simply have been burnt too badly to ever consider re-entering the market.
     
  5. AsxBroker

    AsxBroker Well-Known Member

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    Hi C3PO,

    I don't think any lender will let you fix the rate and then let you have an offset account (I could be wrong), you can have an offset account with a part fixed/part variable as the offset account effectively offsets the variable part of the loan.

    Though alot of clients are coming off fixed rate term deposits from high 7s to 8s and are realising that the low 5s are here to stay (if not get worse in the shorter term) so they are effectively losing 30% of their income. They obviously aren't expected to go and spend up...

    Unfortunately there is always two sides to the coin...

    Cheers,

    Dan
     
  6. Jacque

    Jacque Team InvestEd

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    Good point and I agree that the handouts will only serve to stimulate certain businesses and sectors of the economy. I know, for example, many people of retirement age are simply too scared to spend the money due to the on paper losses of their retirement funds.
     
  7. Chris C

    Chris C Well-Known Member

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    I definitely think we may be throwing fuel into the fire, but at the same time I think the RBA has been given some great pratical examples (Japan, US, UK, parts of Europe) of just how detrimental housing price depreciation can be on an ecomony and I think we can rest assured that housing prices will now receive increased attention from the RBA.
     
  8. Billv

    Billv Getting there

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    Sim

    I don't know if the lending criteria is strict enough.

    Definitely the No Doc loans have just about evaporated but you can still buy property on a low deposit and with no savings history.

    I think lending is one area that needs to be regulated or we could end up with a bigger problem in a few years time

    cheers
     
  9. Jacque

    Jacque Team InvestEd

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    I agree Bill, and banks continuing to accept low deposits (or no deposits!) is only going to harm the market, not improve it, in my opinion.
    Paying off a home loan has always been a form of forced savings for most of us, first home buyers included, but without the necessary mindset and practice of saving in the first place, it only makes it more difficult for some buyers to keep up repayments over the long term.
     
  10. davo6253

    davo6253 Well-Known Member

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    I would agree with OP, this could cause problems down the line, I mean personally I see this as a great time to take advantage of all the bonuses available, the interest rate reduction only adds to that. However, I believe I am fairly disciplined saving wise compared to most my age and those others who could see the FHOG as free money without researching what theyre getting into, could definitely overextend themselves and down the line people unable to make mortgage repayments isn't what we want.

    Also working in a bank i'd like to say no deposit home loans are still around, in fact a lender I know is actively seeking them.
     
  11. AsxBroker

    AsxBroker Well-Known Member

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    I think it'll get messy once the first FHSA are able to be used, that'll potentially pump alot more funds into the real estate market...
     
  12. Jacque

    Jacque Team InvestEd

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    Yes good point. Though it won't be for at least 2yrs yet...
     
  13. davo6253

    davo6253 Well-Known Member

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    With the FHSA - why do you think it will get messy? Sure prices may be inflated, but won't it encourage good savings practices and therefore make the transition into paying a mortgage easier?
     
  14. AsxBroker

    AsxBroker Well-Known Member

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    Hi Davo,

    With the FHSA this will be a nice deposit for home owners who use it. With a larger deposit this can push up the price of property as more money is chasing a similar number of properties. For those who are unlucky enough not to know about the FHSA this will make it harder to purchase as prices are pushed further upwards.

    Banks will probably want to lend more with a larger deposit as well.

    Cheers,

    Dan
     
  15. davo6253

    davo6253 Well-Known Member

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    I suppose it depends how many realise the 2 years 2 days idea, and how many take advantage of the FHSA this year, i'm just wondering if there will be a real flood of cashed up FHSA owners all at one point, rather than spread out over a few years.

    Cheers,
    David
     
  16. Chris C

    Chris C Well-Known Member

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    In two years time I'm sure the media and real estate agents looking to push the sales pitch of "property is about to boom so you should buy now before all the FHSA holders hit the market" will make sure that those that didn't realise will be informed...

    :rolleyes:
     
  17. JudgeDreadz

    JudgeDreadz Well-Known Member

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    hey guys - just with the FHSA. I was under the impression that you could only take the money out after four years of opening it.

    could someone tell me the official rules with these? fido also says you need to be saving for four years.

    "FIDO"
     
  18. JudgeDreadz

    JudgeDreadz Well-Known Member

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    Also, could I get an opinions on interest rates home loans for the next five years? (let me know if this is a thread hijack) =)
     
  19. Billv

    Billv Getting there

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    That's my understanding as well
    Here is some more info
    First Home Buyer Guide - Tips and Advice
     
  20. Jacque

    Jacque Team InvestEd

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    Well that's a big guess from anyone.... :D
    Given the current environment, however, I've elected to fix some of my loans for 3 yrs and have got a good rate with Westpac of 5.89% (thanks Rolf!) which I'm happy with. Still investigating others as we speak and may refinance, depending on what's on offer. Given that the majors are already lifting their fixed rates, I'm figuring it can't get much better for the next 24-36mths with fixed rates under 6%. Then again, none of us can accurately predict. It's about working out what you're comfortable with and planning your cashflow for the inevitability of IR's over the next 5 yrs. As long as you aren't over-extending yourself and relying on these current low rates, then you should be fine. Always allow a buffer of 2% on top of what you're paying (though some would advocate a larger buffer given the long term of 5yrs) and be certain that you've accounted for all costs when considering your purchases.