Lucky 13

Many were surprised at the Australian Reserve Bank’s move to increase official interest rates this week, with RBA Governor Glenn Stevens outlining the basis for such low interest rates has passed.

The 25 point rise will be immaterial to most, as will be the one or two additional quarter point increases the RBA will apply in the short-term, but many new entrants to the property market may be starting to sweat.

First home buyers in August 2009 borrowed $20,000 more than in the same month a year before, with the increase reducing to $13,000 when the now diminishing $7,000 first home buyer boost is taken into consideration.

Constant encouragement by the Australian government convinced many financially inexperienced that they should jump on the property ladder, and they did in droves.

On average 15,300 first home buyers each month have entered the property market since the boost announcement, compared with the 10,300 monthly average for the preceding twelve months.

This roughly represents 50,000 first home buyers entered the market over and above longer term averages, at a time when interest rates lingered at half century lows and economic uncertainly clouded the landscape.

No doubt the boost had a positive impact in the short term, but the ramifications of these initiatives to load the financially inexperienced up with debt are known.

Banks have been sensible during the GFC to generally lower the minimum loan to value ratio to 90 per cent, from around 100 per cent, but many of these first home buyers may not be prepared for the flow on effect from higher interest rates.

Some economic forecasters are estimating official cash in Australia to increase from the current 3.25% level to closer to 5% within the next year, which represents an actual jump around 50%, which doesn’t factor in any bank increases outside the official cycle.

Included in the RBA statement from Stevens was that the now is a prudent time to, ‘begin gradually lessening the stimulus provided by monetary policy’.

My concern is that the first home buyer boost stimulus will be viewed as a debt trap in hindsight.

Time will tell.

First Home Buyer statistics were reported in the CoreData Australian Mortgage Report, and originally sourced from the Australian Bureau of Statistics Housing Finance Commitments.