8 April 2020
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Peter Costello warns that rates will rise and your property's value will fall!

Peter Switzer
20 March 2018

Former Treasurer Peter Costello has warned that interest rates will have to rise, eventually, and asset values will fall. But if this is a surprise to anyone, then they need to embark on an education course called The Bleeding Obvious 101!

This “rates will rise and property as well as share prices will fall” warning was delivered at a conference in Melbourne by Mr Costello, who nowadays is the Chairman of the Future Fund.

To someone like me, the message is so obvious it doesn’t really require anyone as smart as Pete to waste precious time talking about it. However, I guess it’s fair to say a hell of a lot of people out there in borrowing land don’t give a toss about economics until their hip pocket is hit.

Right now, borrowing land has delivered rising house prices, especially in Sydney and Melbourne but you might be surprised to learn that Hobart has been the stellar performer of late, as my chart shows.

As you can see, Sydney has just turned negative, down 0.5% for the year, after three years of double-digit growth. However, Perth and Darwin have had a couple of years of falling property prices, so Pete isn’t telling anyone in WA or the NT that it will come as a surprise.

Sure, it’s great when you pick up the newspaper or go online and see a story that tells you that you’re richer, due to silly, huge price rises but if you’re not a seller, the most it can do is make you borrow more to buy more stuff.

Rising property prices help confidence, spending and economic growth but other factors can reduce the positivity of these price rises, such as low wages growth, which has been the issue for Australia lately, until the job market took off last year creating over 400,000 jobs in 12 months!

Interestingly, Perth’s annual price ‘rise’ has been a negative 2.7% but the monthly signs say the worst is over and experts now expect price rises are coming.

And I’m prepared to bet that we will be ‘lucky’ to see an interest rate rise this year, if the consensus of economists is right, and even the rises in 2019 should hardly be scary. Maybe in 2020 Pete’s warning will come to fruition, unless there is no major reason for a stock market collapse in the interim period. Like what?

Well, a trade war, thanks to Donald Trump’s tariffs could be an economic curve ball that could hit our great economic outlook for the world economy out of the park!

One reason why Pete has done his warning is that there has been over-borrowing by some people because they paid too much for their homes. The former, very good Treasurer has pointed the finger of blame at former Governments and Reserve Bank policy that encouraged borrowing, especially via low interest rates, but both policy-making bodies were having to deal with beating a potential recession, as the world tried to avoid a Great Depression!

If borrowing did not work after the GFC started in 2008, then a lot of people who have worked all that time and have bought houses, gone on overseas holidays and have bought new cars might have been on the dole queue!

The value of Pete’s warning is that for those who don’t think this current economic party will end, well, they will one day have to cope with an economic hangover. And anyone who thinks they might be over-exposed, debt-wise, can always fix their interest rates but they should think about at least a three-year fix because rate rises aren’t about to happen any time soon. And if you are really scared about your debt and the future, maybe a 5-year fix should be considered but you will pay for it.

The best five-year fixed rate I’ve found is 4.39% at U Bank (though you should check out my Switzer home loan fixed rate too!) but if you’re thinking about a fixing option just make sure you look at the comparison rate because fees can make the advertised rate higher in reality.

Good luck with that and thanks Pete for making me explain the bleeding obvious!

Peter Switzer's book Join the Rich Club is on sale for 30% off from the Switzer Store until the end of Easter. Click here to pick up a copy today!

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