Interest Rates Creep Effects

It seems that real estate interest rates are continuing to rise in Australia with the Reserve Banks announcement this week of another 0.25% rise to 4.25%.


It's expected that all major banks will lift mortgage rates and most also lifting their credit card, business rates and deposit rates as well to match.  Of the 4 major banks this leaves Westpac’s standard variable mortgage rate the most expensive at 7.26% and National Australia Bank the only bank below 7 per cent with a rate of 6.99%.

Of course this still leaves rates lower than only a few years ago when mortgage rates peaked at an average of 9.36% in September 2008.

But, many analysts believe the rate rises will continue in 2010.

‘There is barely a word of weakness in the bank's statement,’ said IPAC Securities economist Adam Carr. '’It thinks the housing market is still buoyant and that's the only sign of weakness in an otherwise bullet-proof economy.’   And, Westpac economist Bill Evans agreed. ‘They haven't finished raising rates. The statement points to concerns with the stimulatory impact of the rising terms of trade overriding any doubts about the housing and consumer sectors.’

Even Reserve Bank Governor, Glenn Stevens, speaking on the Sunrise program with David Koch this week said ‘We cut interest rates to what we call emergency settings when we had an emergency’ referring to the global financial crisis and ‘once the emergency has passed and things gradually look more normal, then it's not wise to leave interest rates right down at rock bottom any longer than we need.’  


Stevens emphasized the point by also saying ‘And you shouldn't assume they'll stay low because that assumption will prove to be, you know, unfortunate.’

So, its fair to assume that interest rate rises for apartment owners will continue with a range of effects on them, tenants, strata schemes, managers and others this year and next year.

Some of the most likely effects include.

• Owners will have less money left after mortgage payments and living expenses to pay strata levies so levy arrears ratios and amounts will rise.
• Strata scheme cashflow will come under more pressure as receipts from owners slow.  Even a 5% worsening of levy arrears over 12 months means that a block of 50 apartments will be at least $5,000 worse off on a cash basis.
• Strata managers will need to more closely and carefully manage expenses to ensure essential payments can be made on time.  In some cases strata schemes will need to borrow money.
• It will take longer to pay scheme suppliers, putting pressure on them and possibly slowing service delivery.  And, non essential work by strata schemes will be cancelled or delayed.
• Scheme operating costs will increase as more money needs to be spent on strata levy recovery.
• Antipathy between paying and non-paying owners will increase.

So, it looks like it will be another interesting money year in strata land.

Francesco ...