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Warning of 10% hike in rentals if rates rise

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  • Warning of 10% hike in rentals if rates rise

    Warning of 10% hike in rentals if rates rise

    Author: Tim Colebatch
    Date: February 5, 2008
    Publication: The Age (subscribe)

    Treasurer Wayne Swan says he hopes that the Reserve Bank will not raise interest rates today. A group of property investors says rents will jump 10% if it does.

    Economic consultants predict that up to 300,000 home owners will be at risk of defaulting on their mortgages if rates keep rising. And the ACTU warns that working families "struggling to keep their heads above water" cannot afford any more rises.

    But despite all that, a Reuters survey of market economists finds that 21 out of 24 believe the Reserve's board will raise rates yet again when it meets today — and most believe the chances are very short odds-on.

    Financial markets have inked in a rate rise as a virtual certainty since the Bureau of Statistics reported two weeks ago that underlying inflation had surged to average 3.6%, its highest level since 1991. The Reserve's target is to keep it between 2% and 3%, over the long term.

    But over the weekend, the Reserve received warnings that in suburbia a lot of Australians were doing it tough, and could face extreme financial pressure if rates rose.

    A rise will lift the cost of servicing a typical $250,000 mortgage by $52 a month. It would take the cumulative increase in interest bills on such a mortgage since the 2004 election to as much as $400 a month.

    Each interest rate rise lifts the costs facing home buyers by roughly $21 a month for every $100,000 borrowed. Many borrowers, however, keep ahead in their mortgage repayments, and lenders often soften the impact of a rate rise by stretching out the repayment schedule.

    ACTU president Sharan Burrow urged the Reserve to hold off, and the Government to look for other ways of bringing down inflation.

    JP Morgan and Fujitsu Consulting yesterday warned that another two rate increases would mean 750,000 home owners paying out more than 35% of their income in mortgage bills, putting them in "mortgage stress".

    Between 250,000 and 300,000 would suffer "severe mortgage stress", putting them at risk of defaulting on their mortgages and losing their homes.

    Mortgage Industry Association chief executive Phil Naylor said another two rate rises could tip up to 40% of people with mortgages into financial stress. But he said relatively few would default, with most finding ways to reduce spending in other areas to keep their home.

    Investors Club president Kevin Young said property investors would pass on the increased cost of servicing their debts by raising rents 10% — lifting the average rent for a three-bedroom house in Melbourne by almost $30 a week.

    Mr Swan and Prime Minister Kevin Rudd said the Reserve Bank was independent, and they would not tell it what to do. "I, for one, hope there won't be a rate rise, but (the Reserve) will make its decision independently," Mr Swan said.

    Mr Rudd said the Government would do its part to fight inflation, but he would not "provide public lectures to the Reserve Bank".

    Opposition Leader Brendan Nelson said Labor had inherited an economy "in absolutely first-rate condition", including inflation "below the 3% target".

    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx