Household Debt may actually be “Healthy”!

In an “earlier posting”:http://commercialpropertymadeeasy.com/2007/06/26/family-finances-are-being-stretched/, I raised concern over the dramatic increase in household debt — to the point where it now sits at over 150% of household disposable incomes.

As you can appreciate, the major concern has been as to how rising home-mortgage interest rates might cause a flow-on effect for Commercial investors. And this is because a fall in residential prices could adversely impact upon the security for any line-of-credit you may have against your home.
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Retail Property Activity Continues

As the government spending and tax cuts add to consumer demand, you’ll see the Australian economy continue to grow strongly.
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The Rough and Tumble Marketplace

The recent stock market instability has been more related to investor panic, than to any logic or reason. And you’re not about to see a stock market collapse — which has now been confirmed by Monday’s rebound, following 0.5% rate reduction by the US Federal Reserve.
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What further action by the RBA?

The chances of any further rate rises (by the Reserve Bank of Australia) before the federal election have now diminished, following the recent evidence of wage growth having been contained.
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The Upcoming Federal Election

There has been so much written in the media lately on both political parties. And everyday, you read predictions of a loss by the Coalition, come the election in November/December this year.

However, I recall reading earlier in the year about a study done on elections all around the world, during the past 30 or 40 years. As a result of this study (and despite the present media hype), these various election outcomes have apparently hinged upon three key performance indicators (KPI).
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An Interest Rate Reprieve — for now!

Last week, the Reserve Bank of Australia (RBA) held its cash rate at 6.25% for the eighth month in a row — a decision welcomed by the Government and home buyers alike.

RBA July 07Inflation figures (due out later this month) could put pressure on the RBA to lift rates. However, the high Australian Dollar (at around US 85c) means that there is no external pressure on inflation, from imported goods. And, despite the higher dollar, demand for our exported commodities remains at record levels — which has in turn narrowed our Trade deficit.

Therefore, even with our GDP growing, inflation seems to have remained in check. And this is likely to continue — given the modest wage increase just granted with the Fair Pay Commission.

While the RBA has left interest rates on hold at 6.25% … our rates are still well above other major countries. That makes Australia an attractive place for overseas funds — which is causing our dollar to remain high. And you should see this situation continue for the next 4 to 5 months.

Then, as other countries start to increase their own interest rates … you will quickly see our rates follow suit.

Family Finances are being Stretched

With house prices solid or rising everywhere except in Sydney, household debt is now almost out of control.

In the late 1980s and early 1990s, you saw the highly-geared Business sector collapse as interest rates rose. But now, you’re finding it is households with the high levels of debt.

In 1990, households had (on average) borrowed only 65% of their disposable income. By 2005, that figure had rocketed to 155% of their annual disposable income. And today, it stands at nearly 170%.
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Understanding the Commercial Markets

You have seen strong growth and investor activity over the past 12 months; but neither of these have been very consistent — whether you look across the nation, or within each of the Commercial sectors.

Let’s take a quick look at each sector; and also consider the likely impact that further interest rate rises may have on your Investment Strategy.
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Economy tipped to enter new Golden Age

One of Australia’s leading economic forecasters has predicted a new golden age of growth for the economy as the problems of worker shortages and production bottlenecks are solved amid a continuing boom in demand for commodities.

Canberra-based consultancy Access Economics predicts Australia’s gross domestic product will soar 4.6 per cent in 2007, compared with just 2.9 per cent this year, representing the strongest annual growth rate since 1997-98.
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