INTEREST RATES… EVEN CHARLES DICKENS GOT IT
To borrow the saying used by Charles Dickens's character Mr Micawber… annual income $10, annual expenditure $9, results in happiness. But annual income $10 and annual expenditure $11, results in misery.
It is really quite elementary but unfortunately many Australians are now finding themselves in this position of misery and possibly through no real fault of their own. Most of these people are now in New South Wales, Victoria and Tasmania but it is only a matter of time before a similar level of distress is experienced in other States including Queensland.
In fact, the warning signs are already here and the people who will be most hurt are those people who have brought a home at the peak of the housing market boom and have an insecure income situation. In short, this mainly means young "aspirational" homebuyers whose employment or business conditions have "declined" a little. And the causes of it all are two things, the asset boom and increasing interest rates.
While this situation was quite predictable for seasoned investors, many homebuyers relied on the word of Prime Minister Howard at the last (2004) election that interest rates would remain low. This combined with a banking system that was lowering its lending standards and financing marginal propositions will ultimately end in grief for many people.
Interest rates have increased and will continue to increase further if all the pundits are correct. How far they will go no one seems to be saying at this time. Obviously the higher they go the more borrowers will be in trouble. But in current circumstances, as opposed to the vastly higher interest rates of the early 1980's, these rates are coupled with much higher levels of debt as a result of inflated housing prices. This combination is deadly.
What it means is that it could well be the case that with a higher interest rate, and a lower asset value you could be relatively better off than with the reverse, and present day situation.
Asset values have expanded in recent years because of the additional money in circulation and stimulated growth to ensure demand. Money has been brought into the country on any pretext and both industry debt and personal debt have increased substantially. In addition, billions of local dollars have been poured into superannuation funds, which they simply have to invest, and this has created an enhanced, if not new, source of demand.
So if your mortgage payments get greater and your wages don't follow suite then either your life style has to go down or you sell up and become "downwardly mobile". As there is little hope of capital gain you might be just lucky enough to be able to afford the bottom of the market on the change. Otherwise you are in trouble.
It's not quite here yet but it is coming to a neighbourhood near you. Right now we are standing on the beach wondering why the water is all going out on the incoming tide. The tsunami may well be on its
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