Australia’s property markets have benefited greatly from the record low interest rate environment of the past eighteen months.
And while consumer confidence has seemingly erred on the side of scepticism in general (according to various business surveys), most of us have been feeling pretty good about the ongoing reliability of local bricks and mortar assets.
But the perpetual question property investment pundits are faced with – around this same time each month! – is how long will our environment of ‘cheap’ debt continue?
The Reserve Bank’s bind
A number of economic commentators (both here and abroad) have insisted that an interest rate rise is necessary to put the brakes on some of our ‘runaway’ housing markets (namely Sydney!).
They fear investor borrowing in particular is creeping up into what many believe to be unsustainable levels for our banking sector.
Moreover, the concern is what happens if (and when) interest rates start to rise, and the thousands of households who’ve bitten off more than they can chew at a time when mortgages were more affordable (at today’s rates), start to struggle?
Where will that leave our housing markets and the overall fiscal wellbeing of our nation then?
For longer than any other time in modern banking history, the RBA has maintained its conservative cash rate stance for fear that an already weaker Aussie dollar would dip lower, should even a quarter point rise take effect.
They simply haven’t had the option to control dwelling prices with the usual economic policymaking. And it seems the rate rise card is becoming even less likely to be played as we look to the future and consider the question…
What will happen to debt-laden households if interest rates rise?
It would appear the Reserve Bank has been backed into a corner when it comes to increasing interest rates, and may not be able to play this hand for some time to come, no matter how badly they might want to.
In December last year, our average household debt to income ratio peaked at its highest level since March 2008 at 151 per cent, just shy of the highest ever recorded rate of 153 per cent.
To put it in perspective, this measure has tripled since the 1990s and means our debt levels are higher than most other developed countries.
Most of this debt is associated with home loan repayments. And the central bank is well aware that the monthly mortgage would become a far greater burden on already heavily encumbered Australian households, should rates rise anytime soon.
The RBA acknowledges that in NSW and Victoria, the share of household income needed to pay the interest on an average home loan over the next ten years was already at historically high levels.
In other words, most ‘typical’ households in two of our largest state economies are directing the vast majority of their budgets toward interest payable on property related borrowings.
Given that many of our overseas counterparts have experienced the housing busts many fear we face here in Australia, you can see how the RBA is pretty much up the proverbial without a paddle right now.
Particularly, when investors throughout the world are becoming increasingly concerned about our high debt load and how borrowers might cope (or not cope) if hit by an economic shock, including a sharp interest rate hike.
A word of warning
One day, perhaps sooner or perhaps later, things will turn around and the Reserve Bank will once again start to move rates onwards and upwards – this is almost as inevitable as death and taxes!
While it might not happen for some time to come, property investors and homeowners alike would do well to ensure you’re in a position to continue servicing those mortgages when interest rates invariably start to creep up.
The good times will roll on for now, so by all means it’s great to make hay while the sun shines. Just make sure you’re also well prepared for a break in this ‘perfect property investment storm.’