Former Reserve Bank of Australia (RBA) board member John Edwards may have been echoing the thoughts of a few property investors when he suggested earlier this week that the RBA could increase interest rates eight times in the next two years.
At an incremental rate of 0.25% or 25 basis points, that would add 2% to the current cash rate of 1.5%, taking it to 3.5%. Many banks including Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) are offering variable mortgage rates of around 4% currently, and would be expected to increase their rates by at least the RBA increase.
In other words, mortgage borrowers would be looking at interest rates on their finance of at least 6%, possibly higher. No wonder some high profile property investors are looking at reducing their exposure to the property sector. Nathan Birch, a prominent Sydney investor recently announced that he was selling 10% of his property portfolio (up to 20 properties out of 200+) worth a reported $55 million.
He says this will reduce his debt level to $18 million, leaving him with a $50 million portfolio and ‘a big chunk of cash’. He might need that to cover his repayments if interest rates do rise as predicted by Mr Edwards.
Mr Birch also said that he was encouraging his clients to follow suit. “I’m feeling it, the developers are feeling it, the people that haven’t felt it yet are all those properties that are yet to settle, the big Meriton units. I don’t think the property market’s going to collapse, what I see is a slowdown.”
Joe Barr, CEO of developer John Holland says that there is a massive oversupply of apartments in parts of Australia, and the market has to come off the boil. That’s already occurring with the number of loss-making apartment resales in Sydney and Melbourne rising, according to CoreLogic’s Pain and Gain report for the March quarter.
People seem to forget that house prices can fall as well as rise, with the Sydney median house price falling more than 10% in six months in 2011 as we’ve noted previously, and sinking 13.9% in 2008/2009.
The big concern is that if property investors all rush for the exits at the same time, then property prices may fall much more than most are expecting. Look out below.
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The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.