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If interest rates rise by another 1%…

by Marquette Turner

in Money & Business, News & Views, Real Estate Radar

A recent survey has found 47% of property investors and one third of homeowners could be forced to sell up if interest rates increase by 1%.

This is certainly worrying news for many Australians, at a time when ANZ have predicted interest rates will rise by 0.5% before the end of 2008, with the bank tipping that a 0.25% rise will happen as early as August.

If ANZ is right and the banks continue to raise rates beyond the RBA’s official cash rate increases, the doomsday scenario of rates climbing by a further 1% could eventuate late this year or early next.

The survey of 2331 people by research firm Coredata also found that 76% of respondents are finding mortgage repayments more difficult after seven official interest rate rises in two years, and around 20% of borrowers are using more than half of their total household income on home loan repayments.

One in five respondents say they were running into debt to run their households and 67% claimed their financial situation is worse now than 12 months ago – an increase of 21% from November 2007.

Future interest rate rises may prove controversial. Former Reserve Bank of Australia governor Bernie Fraser says there may be a need to re-think the way the central bank attacks inflation, if rises in food and fuel prices persist.

Lachlan Semple of PSK Financial Services told Marquette Turner that “interest rate increases will further entrench a two-speed economy – slowing household discretionary expenditure while the resources boom continues, driven by insatiable Asian demand. Households, not businesses will feel the pain of recent and future increases, with mortgage servicing costs already up 40% in 12 months. It will feel like a recession in Western Sydney and the the outer suburbs of Melbourne with a subsequent flow on effect to other areas.”

International commentators have noted that Australia is fortunate that it’s government and the RBA have not tried to fend off inflation altogether, but has been quite tough on managing what it can relative to other Western nations.

For those paying higher petrol and food prices, and increasing household income going towards mortgage repayments this is, however, of little comfort for many Australians.

Michael Marquette

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