Interest Rate Rises & Falling House Prices

Apr 12, 2022

This week it's all about... interest rate rises and falling house prices.

This week's video is a response to the RBA's comments that they expect house prices to fall by 15% and the many, many click bait headlines that have followed. I talk about what falling house prices and rising interest rates might mean for you.

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Hey and welcome to Mel's Money Musings.

Now there are a lot of click bait headlines at the moment around falling house prices and rising interest rates. And what I need you to remember as I get into this musing is media, exists to yes, give you information, but also to sell advertising. So the more sensational the headline they can write, the more sensational the article, the more advertising they sell. So I really need you to understand that from the get go.

Now that's not to say that house prices may not fall. It's also not to say the interest rates will rise.

But what I want you to understand is: but what does that mean for me?

And that's what I want to unpack briefly here today. Because if we look at a couple of things that are happening, so the banks have already come out and said, or all four banks have said they believe there are going to be interest rate rises this year.

But if we look at their fixed rates, they've already factored that in. They already knew this was coming. Our share market has already factored a rise in. Economists have been saying for months, I've been saying for months and months, expect a rate rise it's coming. Now, the RBA has come out and said that they're predicting that house prices will fall by 15%, which is why the voices are getting louder as well when it comes to our falling house prices, particularly if interest rates rise, the expectation is that housing prices will fall.

But here's the thing. One, the Reserve Bank doesn't have a crystal ball. Yes. They've used analysis to figure out that 15%, but it doesn't mean 15 % is going to be straight line across the board. Yes, some places will fall further than that. Yes, some places will stay stagnant and some places will rise.

No one has a crystal ball, but it's figuring out what are the long term ramifications for me when interest rate rises and notice I said when and not if, because they are coming.

We are in unprecedented times when it comes to interest rate rises and there will come a point very soon where they start to rise. But we also have been in unprecedented times as it comes to the housing market absolutely galloping off. And that has to slow down and even retract a little. So there's an expectation, certainly amongst economists that that's happening too. What we don't know is by how much and when, because none of us have a crystal ball.

Now the question for you then is what do you do? And I've had a lot of people saying, do I put off buying a house? Or what does that mean for me if I have a house?

Well, first of all, let's look at interest rate rises.

So when a bank assesses you for a loan, they already assess you as if interest rates have gone up by 3%. They assess you with a 3% buffer. So even if you've, uh, had a new mortgage in the last 12 months, when we've been on artificially low interest rates, the banks have assessed your borrowing capability as if interest rates were up by 3%.

So even if interest rates move from where they are now by 3%, which no bank is predicting that. So the big four are saying between 1.25 and 2.25 percent increase, then you already have got that safety net built in around your ability to pay.

What you could do, and what I've been talking about for a long time, is to repay your mortgage at an extra 1% to 3% as if the interest rate was already 1% to 3% more and to pay that directly to your offset.

Now that means that (a) you're building up a buffer, but also when interest rate rises, you are not bothered because you are already paying at that slightly higher rate.

Now as to what does it mean for you?

If you are going to buy a place, if you believe interest rates will drop. Well, first of all, you don't know if they're going to. You don't know if they're going to in the place that you are looking to buy so we don't have that crystal ball. Instead it's about buying a quality property for the long term. And in that case short term fluctuations really shouldn't matter. The timing of when you buy that property really shouldn't matter because if you are aiming to hold for the long term, so more than seven years, more than 10 years, then whether it goes slightly up or slightly down in the short term is kind of irrelevant.

As long as you're able to continue making those mortgage payments, the bank aren't gonna do anything even if you own that property and you creep into less than 20% equity territory, the bank aren't gonna slap you with mortgage insurance or anything like that. All they care about is that you continue to pay your loan.

So certainly when I bought my home about 14 years ago, we bought it at the top of the market. It didn't move in price for I reckon seven years. Did I panic? No. Cause for me it was a long term purchase and interest rates were about 8%. Then again, it didn't matter. Cause I borrowed with that buffer intact and most importantly, I didn't borrow everything that the bank said that I could because I wanted to make sure I had that safety net building there anyway. And I wanted to be able to borrow, to invest or for my business etc. I wanted choice.

So to recap, (a) interest rates are coming. If you already have a mortgage that is already a buffer that has been added in and what you may wanna consider doing is paying it an extra 1% to 3% into your offset account so that you get used to that higher rate.

If you are going for a property, if you are thinking about a property, the danger if you'd stalled on buying that property at the beginning of the COVID because all the experts said that, uh, prices were dropped by 20% is that really it's sprinted away and you would've missed out. So the experts can often get it long, wrong, not long.

Does that mean that prices may fall? Of course they might. But again, if you've bought it for the long term, it doesn't matter what prices do in the short term. You just wanna make sure that if it's your home, then it really doesn't matter, right?

If it's an investment property, it's that the fundamentals are good things like, uh, rental vacancy rates are low in that area. Things like it's close to schools and transport, etc. So you wanna make sure that the long term fundamentals are good.

And as always remember that the media exists to sell at, to give you information and to sell advertising. So to be aware of clickbait headlines, to be aware that they're going to wanna scare you into reading that article and to be careful where it is you're consuming your news.

As always, if you have any questions or thoughts, let me know. If you know that you need my calm wise head on your finances when these sort of headlines and things like that are erupting and you want my opinion, then make sure you join the waitlist for the My Financial Adulting Plan so that you join the next round so that you have that access always to my head.

Because as soon as these articles started to break, we had Financial Adulters popping them in our closed Facebook groups saying, Hey Mel, what do you think of this? And of course I'm answering them straight away. Right? I hope that helped and, as always, have a great week.


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