Your rates equation is dependent upon borrowers being at the variable rate. For those in fixed rates, a blended rate, or with the option of locking in fixed rate protection, a 1% rise will have much less of an impact.
The more important consideration is whether borrowers are over-extended (ie: such that they are eating into their discretionary, disposable income). If so, then your argument has more going for it - a small rise in rates will have a far greater effect on those whose current repayments already account for a significant proportion of their disposable income.
Those borrowing at the margin, with limited home equity in reserve, and a diminishing discretionary spending /income profile, will be most hurt by any resulting downturn, rise in rates, or rise in inflation.
Whilst the near term economic prognosis favours a stable to falling official rate, the RBA has made it quite clear that it prefers for rates to be nearer to its neutral setting of 5.75%.
Also of growing concern is the relative decline in housing affordability.
At the end of December, housing affordability in Melbourne was averaging 109% (and falling), whilst in Sydney, the rate of decline was even more marked.
The Sydney affordability average at the end of December was 75%.
The average home loan repayment in Melbourne (in December, and if memory serves me correctly) was ~$1300 vs ~$1650 in Sydney.
During the December quarter, Melbourne median housing prices flatlined (ie: stable, to marginally up), whilst they accelerated rapidly in Sydney.
Many posters out there, however, tend to criticse the over-extended use of median housing values, arguing that they do not reflect reality, or the true underlying property price.
This is true enough, but generally, it is the only averaging barometer which is in relative easy reach of all concerned (just as the p/e ratio for companies, and sectors, as a whole, is the sharemarket equivalent).
For my own analysis, however, I have started shifting away from median housing values (still, a guide, but requiring of more indepth analysis). I have now started comparing realised room values.
In the weekly auction results, most result listings tend to include details of location, property size, number of rooms and price. The inclusion of this additional information makes for some interesting comparisons, as it allows you to broadly benchmark individual properties, as well as locations.
For instance, Balwyn North prices are typically averaging $75K per room, whilst Balwyn is averaging above $80K, and Essendon is averaging around $70K. Doncaster and Doncaster East are averaging $55K, whilst Lower Templestowe is nearer to $60K. Mitcham is averaging ~$45K, whilst flats in Hawthorn are averaging $70K. And, so it goes on. Again, not an exact science, but the benefits of this type of analysis is that it offers yet again another tool-in-trade.
From an overall market perspective, property prices have already shot up >10% beyond the most contended market peak (ie: consensus of where the market was going to peak, and when - being Q3, 2002).
Currently, the market remains bouyant, with Melbourne clearances last week increasing to 74%, against ~700 properties on offer. This quite obviously had some Easter and school holiday seasonality built into it, but overall property clearance rates have been steadily building since the beginning of the year.
The question though is how much further can they go?
This is a function of many factors, some of which are linked to economic, personal, locality, asset, lifestyle choice, and preferences.
Chances are, there will be a broad-ranging decline in stock turnover (ie: a decline in the overall number of properties being offered for sale) over the coming 12 months, as people (owners, investors, and renters alike) all move to consolidate their positions, and assess their personal circumstances, together with those of the broader marketplace.
But, will this induce a market collapse to occur?
According to the IMF, there is a 40% chance of this occurring. But rather than an IMF induced outcome, I believe that the more likely prospect will be one of the market taking a breather, by either flatlining, or dipping back 5 -10%.
Even then, this will only take prices back to their Q3, 2002 levels in Sydney, or Q1, 2002 levels in Melbourne.
If, however, interest rates remain stable (to lower) for the remainder of this year, then housing prices will return to their ascending rise.
This does not automatically mean that prices will either increase, or rebound, to a compound 10% growth rate (or more) going forward, but nor too will they fall back to 1997 /98 levels (or earlier).
Obvious exceptions will occur, both at the high end, and nearer the lower end of the spectrum. But the danger is that property is becoming less (not more) affordable for many, whilst lifestyle choice is leading to more single occupier dwellings (but with extended family or relationship connections).
The demand for quality property, therefore, will continue to grow, with quality being defined by reference to size, care & maintenance, locality, proximity to facilities, ease of access, etc.
So, where do I see prices heading in 2 years time?
Answer - Broadly up.
In the Eastern suburbs, I see areas such as Balwyn (and its environs) averaging above $90K.
I see Essendon moving nearer to $90K, whilst the Doncaster region will move closer to $70K.
I believe that Lower Templestowe will rise marginally to $60K, whilst Mitcham will continue to average between $45 -50K, with an increasing real estate benefit arising once the Mitcham to Frankston Tollway opens up in 2008 (or earlier).
Hawthorn prices (like in other areas of the inner city) will stablise, whilst those in Toorak could well fall during the next 2 years.
Like with anything, predicting the future is fraught with difficulty (much of it due to subjective analysis, conjecture, and pure hypothetical interpretation).
I may well end up being wrong with what I am suggesting could occur, but already I have seen some sharper rises in housing prices. when determined on a per room basis, as opposed to the more commonly used median pricing approach.
Either way, I am happy to bide my time, continue doing my research, and being selective in my approach.
