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How do elections affect home loan interest rates?

How do elections affect home loan interest rates?

In this week's episode of the Tell Us What You Really Think podcast, Sean and Anthony chat about the first interest rate rise in over a decade, and how this will impact the thousands of people who have borrowed to their limit in recent years.

They also chat about the current state of the property market and how low valuations could play a part in a softening market in months to come.

Then, it's on to the hot topic of the election and the media circus surrounding Australian politics. Comparisons are made to reality TV and Sean's favourite sitcom.

To finish off this week's episode, the boys discuss the current cultural shift that seems to be occurring, with winter fast approaching. Businesses are booming, overseas and interstate travel has resumed, and unemployment is at an all-time low. What does this mean in the grand scheme of things?

Episode 11 Transcription


Sean: (00:00)

Welcome to the podcast, Tell Us What You Really Think. We're Sean and Anthony, and we're here basically to tell you what we really think. We cover all things property, finance, and technology, and we are brought to you by www.ratetracker.com.au. Anthony, welcome back to Tell Us What You Really Think.

Anthony: (00:19)

Thank you, Sean.

Sean: (00:20)

Mate, we had a full script and agenda done for this episode today, but it all had to back-flip. We were all shocked, surprised, or not surprised about the recent rate rise that was announced by the reserve. Nothing overly surprising there, but we'll chat about that a little bit today. That's probably what's going to hijack the media and make a bit of a racket over the next 6, 12, 18, and 24 months...

Anthony: (00:55)

At least until the end of the year...

Sean: (00:56)

At least, at least! And the media have grabbed the reins and run with the notion that there's going to be more rate rises in the next period of time than there are months.

Anthony: (01:09)

Yeah. Well, more than the number of hot dinners we're gonna have!

Sean: (01:11)

Yeah, exactly. So, we'll cover that for a minute. And then, also, we're going to just chat about some of the other things that are stealing the headlines in the election. It's almost like a sitcom! I watch Seinfeld, and I find it hilarious. It's kind of got similarities to the situations that they find themselves in on that show. We won't talk about the politics as such, but just the comical theme that surrounds the whole topic and then just winter bringing opportunities. So we, we are seeing a lot of buoyancy in businesses. A lot of people are busy. A lot of people are making money! So we just want to talk about that, and we're not getting that correlation of doom and gloom in people's individual circumstances.

Anthony: (01:59)

In people's individual lives when we're dealing with clients, yeah.

Sean: (02:00)

For sure. So we're just gonna chat about that and what we're seeing on the front line. Yes. The other thing we'll chat about is the property market, we always touch on that to begin with. So let's cover off on the property market, boom or gloom, sentiments have changed. What can you tell us about the property market at the moment?

Anthony: (02:22)

So with all the talk election generally slows down the market a touch, people don't know. if there's any relevant policies, but there's clearly no policies this year! . But yeah, it has slowed things down. So, from all reports, there's only been a 0.6% increase in property prices, and that was a change from a couple of percent in the previous months. So yeah, no doubt a bit of a slow down.

Sean: (02:49)

In terms of growth?

Anthony: (02:49)

There's still growth, but not as much as late last year and early this year.

Sean: (02:54)

Yeah, for sure. Which is good! That's healthy. We can consider it that way.

Anthony: (02:59)

Yeah, for sure. It's still ticking along. Transactions are definitely still happening. Just not at the sheer volume of what they were.

Sean: (03:06)

Yeah, still getting loads of purchases. I would've thought purchases would have slowed down but there's still heaps coming through. Another one is the regional space. Looking at regional New South Wales andVictoria, they obviously had huge, huge growth over the last couple of years. They're still insanely active. I was chatting to my brother-in-law, he's a builder up in the Golden Valley and they're booked out to the end of 2023. Which is amazing! So they're that far ahead. There's still no land available, there's nothing available that's settling in the next 12 months. And the land prices have now changed, like you were buying a block for $130,000-$140,000 not even 18 months ago. Now they're $220,000-$230,000. That is insane! And still selling like hot cakes. So the demand is there, the population growth is there, and the work is there.

Anthony: (04:05)

And the price point is appealing compared to people looking to buy in Melbourne for over $1 million. When you can get into those markets, you can build a turn-key for maybe $600,000 and get a really nice house. And I know I've been dealing with a few clients recently in Sydney that are looking in Wollongong, the Central Coast, those kinds of areas. If they're able to work from home and the circumstances permit, then why not?

Anthony: (04:30)

And some companies seem like they're not going to change that (working from home). So why not?

Sean: (04:34)

For sure. So, I don't think it's boom or gloom. I don't think it's flat, just ticking along. My first topic for today is looking at interest rates a little bit more indepth. We want to just give people an idea of what to look out for. So there's a couple of things thatwe're gonna chat about. In this environment, there are a few things that are going to affect your ability to buy or borrow in the future. And that is typically if interest rates go up, that will squeeze your borrowing capacity a bit.

Anthony: (05:12)

Yeah, for sure. Especially the ones on the edge.

Sean: (05:14)

Exactly. And there are a lot of people on the edge. I know a lot of people have pushed their serviceability all the way to the limit. So just be careful if you're on an interest-only term, and you're going to roll off an interest-only term back to a principle and interest term. That means that you have to be able to show the bank that you can afford to put it back on an interest-only term. Otherwise, you could potentially get whacked with an extra $1,000-$2,000 a month to pay the interest now. Look, it's great if you can afford to pay off your investment property too, but it's probably not best practice, and it's probably not something that you are planning on. So just be mindful that although they're going to probably creep up slowly, we should be able to monitor that. Just be very, very careful on rolling off interest-only terms.

Anthony: (06:02)

Yes.

Sean: (06:03)

And what about the banks' behaviour? Give us a rundown of how the banks behave when interest rate changes are happening really frequently.

Anthony: (06:15)

Yeah. So they're not shy to go up .25% when the RBA goes up, but what the banks have done is increase their fixed rates a long time ago. So variable rates now are at that point where they're still somewhat attractive, but the fixed rates aren't. And they're making it a really hard decision. Because alot of people are asking, should we be fixing? Should we? Shouldn't we? How does it all work?

Sean: (06:39)

But where are they getting that motivation from to ask that question? They're getting it from what they're seeing out there.

Anthony: (06:46)

Yeah. The media speculation of how quickly it's going to potentially go up. And if people are really going to be in a pickle if things go up quickly.

Sean: (06:55)

Yeah. And you couldn't fix now, even if you were to fix for a 1-2 year period, the rates that you'd be fixing at are in the high 3%-4%. There is no way that you're going to be able to recover the amount of money that you'd be voluntarily handing over to your bank for that first 6-12 months, when the variable would've been cheaper.

Anthony: (07:19)

By about 1.5%, would you say?

Sean: (07:22)

Yeah, easy! So if you can get a variable rate at 2.2%, versus paying a 2 year fixed rate at 4.2%. That would have to mean that the variable rate would have to blast past 4.2% before you even start making ground.

Anthony: (07:42)

Yeah. And by the same margin of what it went from in a shorter period of time, within the fixed-rate period.

Sean: (07:47)

Yeah. So, you've got no chance.

Anthony: (07:50)

So, the banks are prying on people's stupidity to get them to lock in just making it somewhat still manageable. And if the RBA are saying, "oh, it's gonna go up by 2% in 12 months!", which it is... Look, I don't want to put the Mozzer on it, but I don't think it's possible

Sean: (08:10)

Not 2% in 12 months.

Anthony: (08:12)

And some of the outlandish stuff people are coming out with... Go away!

Sean: (08:15)

Yeah. And I mean, look, I'll sit here and take it on the chin if it does, but I would have to say, I can't see that happening. Otherwise, we'll have some really cheap properties on the market; you'll be able to buy whatever you want for whatever price you want because no one is going to be buying.

Anthony: (08:29)

Yeah, I agree.

Sean: (08:30)

And what about valuations? Do you think there's any risk of valuations changing?

Anthony: (08:35)

Valuations are always based on comparable sales and recent sales history over the last three months. So right now, no. But if rates continue to go up, if there is a continued softening in the market, those sales of six months ago, compared to historical data... That could play a part, no doubt.

Sean: (08:58)

And I guess the people at risk are probably the ones going to auction. We generally find auctions slow down in a buyer's market. They usually revert back to private sales, with more for sale by negotiation. The biggest risk would be for someone rocking up at auction, going toe-to-toe with three or four bidders. Yeah. If they're pushing the price up for their dream home, and they push the price up to a point where there aren't comparable sales anymore. Especially if the comparable sales have started dropping, but this particular property might have been a standout in the area. So just be a little bit mindful, and have a think about those things before falling head over heels for a property and overpaying.

Anthony: (09:44)

Yep. Great.

Sean: (09:46)

Now this is the one that's probably a little bit of a funny topic at the moment when we look at the headlines. The media are having a jolly old time with this election campaign. This country can't possibly feel confident with the leadership of this country. No one's confident on either side. I don't even know why there are only two sides. But all of that put aside, we're not here to talk about politics, but it's a laugh. And the media are literally not giving anyone an opportunity to be liked.

Anthony: (10:26)

Yeah. Look, they've got to put a slant on it. Obviously, media companies are aligned with certain parties. So they're going to put a negative slant on the ones they're not supporting and a positive slant on the ones they are.

Sean: (10:37)

But they're just making it look.... This is what I was talking about with the Seinfeld sitcom. We just look like idiots on a global scale.

Anthony: (10:46)

I don't think it's too good anywhere you look.

Sean: (10:49)

No. And that's what I was going to say. Unfortunately, you can look at all the other countries that are laughing at us, but they're not that much better. And all of these leading Western nations, just blah blah blah, they're all in the same circus. I don't know. Something's got to change to gain voters' confidence in the captain of the ship.

Anthony: (11:11)

Yeah. They do try to catch them out a bit too much, trying to give them curveballs at the last minute. Asking "What's the GDP?" or "What's the unemployment rate?". These guys aren't just a memory bank of everything. It's just a big show, but unfortunately, with rates going up and with the election happening, there are a few factors at the moment that are flowing onto the property market. Hopefully, we can just move on once someone gets elected.

Sean: (11:40)

Yeah, exactly. And that's what happened in 2018. So we'll see how this one pans out, but unfortunately, all the smart people seem to do other things. Not many go into that line of work. And I wouldn't either! So mate, the last point before we move on to the closing notes is just looking at what sort of opportunities are coming up this year. We've got people travelling and going overseas left, right and centre. Everyone I know is trying to get away and go somewhere new for the winter – or at least just go and see family and friends. People are already travelling the world. I was chatting to one of the guys that I have a coffee with in the morning. He just got back from Hawaii, and said it was effectively fully normal in terms of travel and going to the airport. He said that he went to Fiji over Christmas, which wasn't normal. It was more like a militant operation getting through the airports. But all of that was completely gone this time. So that's fantastic. He got over to Hawaii. He spent the week over there, came back, and it was just smooth.

Anthony: (12:46)

That's what it's about!

Sean: (12:48)

So we've got that, right? We've got travel. We've got people with cash. How are your clients and your friends in their businesses? Businesses seem busy...?

Anthony: (12:59)

Yeah – even the hospitality clients! And those who have been hugely affected. They seem to be back in full swing and fully booked at least a week or two ahead. So it's great to see.

Sean: (13:12)

And we're not just talking about one specific type of restaurant. Every restaurant is busy and every restaurant is booked out. Doesn't matter if you want to go to a $, $$, $$$ or $$$$ – or however many it goes up to in the top end of town where you go – but it's always at least a week out to get a Friday or Saturday night. So that's awesome. In terms of building, all of the construction industry are still busy. Financial services are busy. Legal is busy.

Anthony: (13:48)

Everyone is busy! Busy being busy.

Sean: (13:49)

So I don't see the correlation between that and historically, other moments in time when everything imploded and you started to see things like unemployment shoot up, when people lost income and couldn't pay their mortgage. In which case, the banks' default rates and delinquency went up. Those things aren't happening yet.

Anthony: (14:15)

No.

Sean: (14:16)

Now that interest rates have come into effect, and they've started going up, people are a lot smarter. They've got a lot more cash because they've just been putting it away for a couple of years. They've become a lot more savvy with their money. Household debt – other than in Sydney and Melbourne – is actually at a record low. But the problem with Sydney and Melbourne is that the property prices are so much higher than the other cities and people are stretched. So Sydney and Melbourne are probably the ones to watch. And they're probably the ones that I would say based on A) the population density and B) the fact that if something was to go wrong in those two cities, it could cause a ripple effect. But at this point in time, everyone I speak to has never been busier. Yeah. They've never had more income and never had more savings. So I think it will be a different turn of events in the way that this plays out over the next 12-18 months. I think that there is definitely a necessary reset, but I don't think it's going to be aggressive.

Anthony: (15:20)

Yeah, correct. Rates will go up, but everyone seems to forget that rates were as high as 17%-18% in the late 80's and early 90's.

Sean: (15:29)

Anyone whose parents had a mortgage at that time will never forget because they get told every time they see them.

Anthony: (15:35)

Every time! And we are worrying about interest rates at 2% when they're gonna go up 1% – to 3% or 4% – when historically, they are phenomenal rates that you'd take every time. If you had a choice, if you looked at the history of time and interest rates.

Sean: (15:52)

Yeah. I'm a big believer that everyone is in control of their own fate. Everyone should run their own race. So we shouldn't really have any reliance on all of these external factors, like interest rates, government, blah, blah, blah. Don't get caught up on that hamster wheel of saying, "Someone else is going to derail my operation!". So I guess in closing, my parting thoughts would be, that we need to be mindful of the dumb stuff that other people do because that can cause things to derail. So at the moment, if we have people that are leveraging themselves too high, people in business that are robbing Peter to pay Paul, if all of this stuff starts happening, just be mindful of the things that other people can do that can impact you. Don't worry about the government or those sorts of things because, realistically, you can navigate your way through those waters. I don't think the markets are going to implode. I don't think it's going to be a catastrophic implosion. I guess it's probably not the right word to use implode, but I would say that there has to be some kind of reset.

Anthony: (17:15)

Yeah. A softening of the market, you would think. Transactions will be down. People will be a bit uncertain. So a lot of that stuff is going to happen. But I agree, it's not going to blow up, and we're not going to see significant drops.

Sean: (17:30)

Definitely not. I think the world's just on edge. They probably don't trust many people either. There's plenty of stuff happening, but the reality is that it's not the first time we've been around this cycle.

Anthony: (17:45)

Property cycles. Yeah. And that's all. We're going into a bit of a dip, but that's where the opportunities might present for people that've been waiting to get in the market. Maybe it's now, as it definitely wasn't last year.

Sean: (17:55)

No, unless you wanted be up against everyone else in the street. So mate, like I said, the contents of today's show quickly flipped and revolved around pretty pressing current matters. So I think we've covered that. We'll keep an eye on it. Look, they're going to meet once a month. They're gonna keep coming out with the same news.

Anthony: (18:16)

And we'll hear a lot of it, because it's been the first time in 10 or 12 years that it's gone up, we so obviously needed to focus on it for this epsiode, but the other ones might just be comments.

Sean: (18:27)

Yeah, I think so. We'll just monitor the situation. We'll sit tight and keep helping people do what they do. There's a full blog post on www.ratetracker.com.au if you wanted to have a little bit more of an in-depth understanding of why the ship has sailed on fixed rates. And why it's probably not a good idea to go and fix your rate now.

Anthony: (18:56)

It's a great article to have a look at!

Sean: (18:58)

Yeah, definitely. And it just shows that the banks have got all of this priced in pretty well. So thanks again for tuning in. Anthony, you beauty! Great to be here. We'll see you next week.

Anthony: (19:07)

Cheers.

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