The US housing market is expected to drop by around 10-15% from it's peak before a recovery starts in late 2008 (unless delayed by a recession in the US). In comparison the Australian residential property market is still doing quite well, and even the Sydney market is expected to increase by between 5-15% this year, except from properties in the so-called mortgage belt that will continue to struggle to find any support due to the on-going crisis of affordability in the mortgage market.
The recent round of bank mortgage rate increases in Australia of between 0.10% and 0.20% was attributed to the global fallout of the US subprime meltdown, and will hit hard the "battlers" and "working poor" already struggling to afford home ownership with housing affordability at record lows. If there is another official interest rate rise of 0.25% by the RBA the Australian property market is likely to remain subdued during 2008. In Australia the economy is still growing quite strongly (as measured by the GDP), but there is concern that inflation will nudge above the official target band of 2-3%.
I take a middling view of prospects for interest rates and the property market in Sydney. My ROI targets for this year assume the value of my Sydney properties will increase by around 8% during 2008, and we have approximately half of our home and investment property mortgages at a fixed rate for five years. As the fixed rate is now around 1% less than the current variable rate, we are likely to end up ahead by fixing part of our loans early last year, even if interest rates peak this year and trend downwards in 2009 and beyond.
In the US the Fed is still cutting rates in an attempt to avoid a US recession. But the danger is that inflation could be given a boost. The last thing the economy needs is a return to stagflation, last seen during the last "oil shock".
Copyright Enough Wealth 2007