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While the prices of housing in Finland hasn't seen the extreme rises of Australia, there are still concerns about what is going to happen to mortgage repayments as interest rates rise over the coming two years to combat inflation. In Australia, the expectation *was* that rates wouldn't rise until 2023 at the earliest, but that was always going to be a load of crap, at least for anyone who believes that printing incredibly high amounts of money will lead to inflation.

![image.png](https://files.peakd.com/file/peakd-hive/tarazkp/23wqg5KPbMNcAAgQqV9jxTArgqMA8g9Ny9Dp6MjgskxQnjNbVzndyADLBsjZsbnjqeM2H.png)

What is going to be interesting is that over the last couple years in Australia, for the first time in a long time, there have been a far greater percentage of fixed rate home loans, which is due to the incredibly low rates on offer, and of course the growing size of the loan amounts. However, the terms for the fixed rate before returning to a variable is only a couple years for most, and that means that once the rates do shift back (with a lot ending in December 2023), they are going to be hit with multiple interest rate rises at the same time. 


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This is going to be a bit of a shock to the system for many, with the expectation that on a 400K and at an interest rate of about 4.5%, this is likely to add another 500 dollars a month *on top* of the mortgage amount today. 

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However, this is not a very good indicator of the amount to expect to pay, as according to the Australian Bureau of Statistics (ABS), toward the end of 2021, the average mortgage in Australia was 550K, 30% higher - which means it is more likely to be $700 additional per month to find or, 8000 dollars extra. And in the Sydney area where the median house price is over a million dollars now and requires a 20% deposit, there are going to be many people with +800K mortgages, that can expect a rise of $1200 dollars more a month or around $15,000 more. In a country where the average salary is around 80-90K a year, that is a massive amount *extra* to find.

On top of this, the increase in interest rates will likely be followed with a fall in house prices, with some estimates indicating up to a 30% drop in value. This is because higher rates means less people are able to afford loans, dropping demand until a new floor equilibrium is found. Long-term this isn't too bad for mortgage holders, *unless needing to sell* because the mortgage repayment level is now untenable. 

But, there is more to it than just dealing with mortgage costs, as the reason that the rates will rise is due to the inflation rate, which means that the cost of everything is going up, with a lot of "necessities" like fuel prices (Australia is a large country and the distances needed to cover often require owning a car at a practical level) are increasing above the inflation rate, especially on the back of looming war between Russia and Ukraine. But, many costs have increased also, with *healthy food* seeing increases of over 20% in the last year alone in some cases. 

This means that not only will the average mortgage holder have to find additional income to cover rate rises, they will also have to find it to cover other life expenses and in combination, this is going to be difficult.

Perhaps where the opportunity lays for some is for those who didn't FOMO into the housing market in Australia over the last two years and instead used their income as an investment mechanism to generate wealth beyond the inflation rate and more. It is possible that once the housing markets do crash, they will be able to reallocate their wealth from near-liquid into physical assets at the bottom of the real estate market, buying up other's broken dreams. 

It might seem like a morbid way to look at it, but often this is the case in many markets that are on the way down in the cycle, as people sell because they *must,* not because they *want* to. Economics seems cruel in many ways, because behind all of the numbers, there are real people and their lives at stake. However, this is just the way it works and unfortunately, there is unlikely to ever be an economy that is always going to be win-win across the board, unless there is a perfect AI system that can perfectly implement the perfect communist economy - but that isn't going to happen, as this isn't Star Trek. 

So, that leaves us to largely fend for ourselves in regards to our own wellbeing and while we all make the best decisions we can in the moment, the truth is that all decisions are going to be on a spectrum of outcomes based on many factors. Buying a house in the last two years might have been the smartest financial move they will ever make, for another person buying the house next door, it might be their biggest regret. What determines the difference is going to depend on many aspects, but in general the ability to manage the debt *long-term* and under less than ideal conditions is going to be the main factor. 

A lot of people have overextended and exposed themselves to a high debt burden in order to get their "dream home", pushing their loan to the outer limit, even though interest rates are at the lowest they have ever been. This means, they can only really go up and with a loan of 25+ years, the chances of that happening are very high. A couple of percent will make an incredibly large difference to many families out there and unfortunately, some of those dreams are going to turn nightmarish. 

For mortgage holders, the next couple years are going to probably be rough, so if you expect that you are going to need more to cover the future, it is best to start preparing as best as possible now. How to prepare is determined by personal conditions, but it is likely going to take more than belt-tightening for many, so look for additional income streams as well. A year or two from now, it might get pretty turbulent in the home, so having a few extra months of costs put away, might be enough to make the difference between bankruptcy and seeing it through to the other side.

I hope everyone makes it, but that is unlikely.

Taraz
[ Gen1: Hive ]


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