Originally published by Chamber of Merchants
Author: the Speculator
No doubt that over the last 20 years investment in Australian property has been an exceptional earner. With interest rates near record lows and the market continuing to boom, its little wonder every man and his dog own at least one property, with most of the people I know having mortgages on 2 or more. In fact I can count the number of people I know that don’t own any property on 1 hand, the good old fashioned renter – a dying breed?
One day at work not too long ago, a colleague left his internet banking page open on the computer, and being the curious one I am, I took a peek. Two properties with a total negative bank balance of $757,000 and savings of under $10,000. Yikes! His annual salary was $59,000.
So now that there is talk of interest rates rising in the medium term, what does that mean in real dollar value for the savvy property investor?
Now to be fair I don’t know what this guys interest rate was, but if rates went from 4% to 6% he would be paying an extra $10,452 a year in repayments or 17.7% of his salary before tax just on the extra repayments. at 7% it would be an extra $16,068 or 27%.
Assuming he rents 1 property out for $400 a week and gets paid $47,060 after tax at his job, his total combined income would be around $68,000 (not including tax on his property income).
If rates did get to 7% than his yearly repayments would be $63,544 or 93% of his income.
Was he worried about higher interest rates? Not at all.
If you have a loan or loans have a look at the table above and calculate your new repayments.
Rising interest rates are not the only thing too worry about if your heavily in debt.
Watch this video from Canada’s Central Bank
Two vulnerabilities that they are concerned about
- Households that are carrying a lot of debt. Check.
2. House prices are rising at an unsustainable rate. Check.
Now pair those two factors with the following charts.
So to sum it up, if there was a rise in unemployment and you had trouble paying your debt that would increase default rates (same with rising interest rates). If this happened house prices would fall as everyone rushed to sell. Reduced house prices would cause a reduction in household wealth. This would create a snowball effect on the economy causing the banks to panic because of house price valuations and it would most likely all go down hill from there. So how do you predict these things? Look at the charts.
Here is another one if my favorites, the AUD/USD Currency chart. 60c here we come?
