Interest rates are a bottom line issue for many homeowners. They determine how you budget, what you can afford and many other vital decisions.
Rates have been at an all-time low for many years now and it looks like they're about to rise. Here are our predictions for interest rate moves throughout 2017.
One of the main reasons for rising interest rates in Australia is the US economy. The Federal Reserve has been talking about raising interest rates for some time now, and the first actual rate rise in a long time happened in November 2016.
That's not the whole story. The US economy is in better condition now than it has been since the big crash of 2007–2009, but it's still an each way bet. Market moves, in particular, can affect how interest rates react. Employment figures are another working number that can directly affect American interest rates.
The Australian market also has its own issues. High prices, a low first home buyer participation rate, and talk of a possible recession can keep Australian interest rates low for some time to come. A slowing housing market would also impact Australian interest rate moves.
A combination of American interest rates and Australian dollar values is also important. If the American dollar goes up as a result of increased interest rates, the Australian dollar will fall. If the Australian dollar falls, exports become more competitive, reducing the risk of a recession. That, in turn, means that Australian interest rates won't need to move much, if at all.
The Rising Rates Scenario
The good news for homeowners is that interest rates won't rise quickly. It is neither practical nor desirable to suddenly hit homeowners of Australia with increases. The best approach is to allow time for people to adjust their budgets and adapt to higher rates.
The Reserve Bank of Australia typically does not raise interest rates quickly. A half a per cent interest rate rise is usually the maximum. Rises are usually followed by an assessment period to see the effects of interest rate moves on the economy.
Another option for homeowners, of course, is to switch from flexible rates to fixed rates. You can lock in a predictable interest rate on a new home for up to five years quite easily.
Prices and Interest Rates
Market wisdom is that low-interest rates have promoted higher house prices. That's a bit simplistic. Competition for valuable space in Sydney and Melbourne has definitely raised prices, and a national housing shortage has added to that effect.
Rising interest rates probably won't have much effect on house prices. Prices may plateau, and not rise as quickly, or for high-end properties, prices may fall slightly. The mainstream market won't feel any drastic effects from rising rates, especially not at the very slow pace predicted.