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Why property owners should be worried

It’s no secret that property prices have slowly but steadily been heading down over the past year. It hasn’t been a crash by all means, Sydney house prices aren’t far off from being down 5% from the peak last year.

Some members of the government, bankers and economists may be slapping themselves on the back for managing the housing market risk. After all, some shares move by more than 5% in a single day.

However, there is nothing to say that prices will stop declining this month. Credit from Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) has fallen significantly according to reports. Some say it’s a drop of 10% to 20% in loan size for the borrower, others have pinned it as an average decline of $200,000 per application.

Whatever the reduction, it’s sizeable and this is before the Royal Commission has made any recommendations.

Of course, any predictions about house prices is purely speculation. But, saying that house prices double every seven to ten years is even more speculative!

What isn’t speculation is that lenders are putting up interest rates mainly due to rising US Fed rates. Australian lenders are feeling the funding pinch.

Just today, the AFR is reporting that large non-bank lender Pepper Group has put up its interest rate by 0.20% to 0.55% on new loans.

This is on top of other secondary lenders that have already increased rates like AMP Limited (ASX: AMP), Bank of Queensland Limited (ASX: BOQ), Suncorp Group Ltd (ASX: SUN) and ME Bank. Readers may remember that big banks also increased their rates a while ago as well.

Foolish takeaway

Property owners are now experiencing out-of-cycle interest increases at a time when budgets are tight and wage growth is limited. The big banks are already reporting a slight increase in arrears and if interest rates continue to rise you may see more forced property sales.

This is definitely not a prediction of Armageddon, but most of the factors that were working for property owners are now working against them. It would be wise to increase cash in the bank and/or pay down debt in this rising interest environment.

If I had a lump of cash to invest I'd definitely put it into quality shares like these rather than an investment property.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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 Scott Phillips.

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