Following recent warnings by the Governer of the Reserve Bank of New Zealand to consumers warning of further interest rate rises if spending is not reined in, it is worth noting the comments of finance managers in Australia.
Standard and Poors credit rating agency recently reported that 10% of mortgages in Australia are in arrears, including nearly 5% that are more than 90 days in arrears. It is only to be expected that if interest rates increase this figure will worsen.
John Symond of Aussie Home Loans was reported as saying that even a 1% rise in home loan rates could have a devastating impact on borrowers and he advised borrowers to be cautious and not overcommit. He predicted that South Australian property values would fall in the next 12 months by 10% and that values would continue to fall for a further 3 years.
Home owners under stress because of rising interest rates could flood the market and force house prices to drop drastically if (when) rates rise in the next 18 months.
Australian household debt stands at $605 billion so Australians would do well to heed the warning from New Zealand's Reserve Bank Governer. While industry leaders are starting to speak out in Australia, our Reserve Bank has not issued any strong warnings. Borrowers may have become complacent due to the temporary plateau in rates but many experts are predicting rates to rise again in 2006.
Borrowers who are going to be under pressure when interest rates rise another 1% would be well advised to take preventative action now, rather than waiting and being forced to sell in a declining market.