The Motley Fool

This Nasty Beast Could Cost You A Fortune

Interest rates could yet be heading higher later this year.

It’s great news for savers and importers. It’s great news for shoppers at stores like Harvey Norman (ASX: HVN) and JB-Hi Fi (ASX: JBH). At the rate we’re going, a flat screen TV will soon cost the same as one of Warney’s KFC finger lickin’ chicken nugget meals, with fries.

Travellers heading to Europe and North America should also be celebrating. If nothing else, rising interest rates should see the Aussie dollar stay comfortably above parity with the greenback.

It’s not so good for travellers visiting Australia, however. We recently received an email from Monica…

I’ve been an avid fan of the Motley Fool UK for about 10 years. I’m a Brit currently travelling in Oz and hoping to move here so really pleased the Motley Fool is coming over too.

While I’m more interested in investing (mainly high yield and property) I am finding Australia and especially Sydney incredibly expensive.

Also are there any videos of the launch events with David Gardner? I would have loved to attend but was unable to.

Cold and expensive

Any Aussie who has visited, or indeed lived in London, will know it’s one of the most expensive cities in the world.

My backpacking adventure to the U.K. lasted a little longer than a year or two. I stayed for 18 years, starting up Fool UK in the process. It was fun, rewarding, educational, enlightening and cold.

But hell, London was expensive, especially housing costs, both renting and buying. And as far as what you got for all that money, let’s just say I lived in some pretty modest digs in my early years in London.

Less beer

Back then, one Aussie dollar got you 40 pence. In the late 1980’s, it cost 4 bucks for a pint of beer. In Australia you struggled to buy beer in pints, and struggled to see anything other than Carlton Draught on tap, but I’m sure it would have cost far less than $4.

You get the drift.

Fast forward to today, and now the Poms are saying Australia is “incredibly expensive”. Well Monica, I know the feeling, if it’s any consolation.

And the scary thing for Monica and other in-bound tourists is Australia could become even more expensive.

One nasty beast

Higher interest rates are ultimately aimed at curtailing inflation.

Unchecked, inflation is a nasty beast. It eats away at your savings without you really noticing. Before you know it, a pint of beer might cost $10. Good bye savings, hello health.

Just this week The Australian Financial Review says…

Demand for labour will strengthen further this year and drive up wages, new data suggests. This, with rising fuel prices, could make interest rate rises more likely.”

The same newspaper quotes Stephen Roberts of Nomura Australia as saying the Reserve Bank of Australia (RBA) will raise interest rates by a quarter of a percentage point both in May and August.

More pain

Stand-by for more mortgage-belt pain. With the Big 4 bank standard variable interest rates already at close to 8%, this is going to hurt.

It’s also going to continue putting pressure on house prices. In some areas, house prices are already falling. This could accelerate the process.

All of which gives economists and soothsayers much to write about. Steve Keen, ever the housing bear, recently published his Australian Debt Update.

Complete with lots of sloping lines on charts, most going from top left towards bottom right, he concludes…

So get used to it: mortgage debt drives house prices, and growth in mortgage debt is now ending. The recent falls in house prices are just the beginning.”

Why buy property?

I wouldn’t be buying an investment property now, or for a long time. For one, the yield is abysmal.

Why anyone would accept a net rental yield of 3% or even less is beyond me, especially when you can get 6.5% risk-free (pre-tax) by plonking your money in the UBank.

[The Motley Fool has no affiliation with UBank, although I do have a savings account with them, thank you very much.

And if they too could increase their savings rate in line with any coming RBA increases, that too would be appreciated, although I’m realistic enough to think it’s unlikely to happen.]

Protect yourself from inflation

Our free report, Gold & Beyond, we look at 3 ways you could protect yourself from inflation.

You might be surprised to learn real estate has historically been a classic hedge against inflation.

It won’t be this time. Not in Australia anyway. Maybe it will be in the U.S., where houses swap hands for as low as $1…not that you’d want to buy a house in these American ghost towns.

You can, so I hear, buy condos in Miami on the cheap. And Miami is also not a ghost town, so I hear…

According to National Association of Realtors, the median price of an existing single-family home in the Miami metro area, which includes condos, fell 18.3% in January from a year ago, to $US165,800.

Cheap, maybe. But I would be very careful before agreeing to buy a house or condo in a place I’ve never visited, off people I’ve never met, and when it’s supposed to be the latest hot investment opportunity.

Scamming the Aussies

Australians especially, although I guess it happens around the world, can’t help but chase the hot thing of the moment. Some are downright scams, some depend on perfect timing, and some are just bad investment choices.

Believe it or not, according to the Sydney Morning Herald, Keith Johnson, the largest residential land developer in NSW, former Queensland treasurer, Keith De Lacy, a former bank executive, David Kenny, and a raft of property developers, hoteliers and pastoralists have all been stung by an alleged “Western Gulf Advisory” fraud.

As ever, if you go by the motto “if it seems too good to be true, it usually is” you’ll steer clear of most problems.

No mortgage, no stress

Back to our Pommy friend Monica…

We hope you can enjoy Sydney, and Australia. If you do decide to settle here, I suggest you rent. Or live in the bush, pick grapes, and get a good suntan. Life will be far less stressful than paying a massive mortgage.

And as for videos of David Gardner’s launch events, it was actually his younger brother Tom who was recently here in Australia. As a clue, Tom is the short, bald brother, and David is not. (hi Tom).

We didn’t video the events, but we do have a couple of links to Tom’s Aussie television appearances.

Ticky Fullerton interviews Tom Gardner on ABC’s Lateline Business.

Australia Financial Industry is ‘Bloated’ – CNBC Asia

Enjoy! And, happy investing.

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