Well well well.
Look where we are.
Is anyone surprised interest rates are increasing at such a fast rate?
What do you get when you give out nearly a trillion dollars in handouts, drop interest rates to historical lows and relax the responsible lending laws that we were told were oh so important during the Banking Royal Commission?!
You get some of the most expensive and over-priced property in the world.
And you get people that shouldn’t be borrowing big dollars...buying bloody expensive houses.
People just can’t help themselves.
A famous quote in the housing market is that there are only two factors that affect house prices - demand and supply.
Higher interest rates affects demand as people simply won't be able to borrow as much going forward.
So let's have it - some basic maths for those with an appetite for debt.
Did you know that if you have a $1,000,000 debt, the forecasted 2% interest rate increase will not only cost you an additional $20,000 in interest per year, but will also increase your payments by over $1,000 per month?
That’s a lot of money to find every month.
This is going to hurt a lot of people, especially those that borrowed more than they could afford and paid a premium to secure their property.
Let’s take a high-income earner as an example, someone earning $180,000 per year with a $1,000,000 mortgage.
Sadly, this is not unusual anymore.
A 2% increase in interest rates will cost an extra $12,000 in repayments per year.
The problem is, to have the cash to pay an extra $12,000 in repayments, they need to earn $19,672, pay tax at 39%, to have $12,000 leftover.
That 2% interest rate increase is akin to a $19,672 pay cut.
Fun times.
But it gets worse, as the value of your property is potentially also declining while your costs of ownership increase.
Ouch.
It is a situation people should have seen coming.
You can’t give out nearly one trillion dollars in handouts and not expect inflation.
You can’t drop interest rates to historical lows and relax responsible lending laws and not expect property prices to increase.
So here we are. Standing on the precipice of a recession.
Tread carefully Australia.
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