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The Impacts Of Interest Rate Volatility

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Question:

Discuss about the Impacts of Interest Rate Volatility on the Growth of Australian Property Market.
 
 

Answer:

Introduction

Interest rate is the price of money. The price of Australian property changes depending on the level of interest. Rate. For instance, in the year 2015, the interest rate was fell causing a fall in the price of houses. In most economies, the purchase of a property in the property market is done through mortgaging. This is the process in which an investor or a consumer buys for instance a house on a loan basis. The buyer of the property gets the ownership of the property and uses it as he/she continues to pay the mortgage. The amount of loan taken is less than the accumulated monthly payments after the mortgage has been fully paid. This is because some interest rate is attached to the monthly payment so as to compensate for the time value of money and for the risk taken. Many investors are attracted to the Australian property market owing to the rising value of the properties (Oliver, 2015). The demand for houses has gone up. What some people are not aware of is that higher prices of houses may have a great influence on the interest rate which might in turn push the mortgage rate. If the mortgage rate goes up, the future returns from these investments will be low.

Interest rate is an important factor in the economy as it’s a monetary policy tool of the government which is influenced any time the Reserve bank of Australia (RBA) needs to stimulate macroeconomic indicators such as unemployment rate, inflation rate and the economic growth. The government sometimes lower its cash rate to stimulate the demand for house (Chande, 2015). In order to stimulate consumption and investments, the RBA changes cash rate so as to lower the interest rate. However, the macroeconomic policy of low interest rate is harmful to an economy as it results in a greater demand for money. This stimulates the investment level and may result in an economic bubble. Most of this investment are poured on the stock and real –estate markets.

The percentage charged for money use is the interest rate. When money is borrowed, the interest is charged based on a stated interest rate which is payable when the loan is being paid. The lender charges a borrower a proportion of the total loan amount as an interest rate. The interest rate is stated in monthly, quarterly, semi-annually or annually. The expensiveness of the loans advance by banks is caused by the interest rates. During periods of high interest rates, the amount of money available in an economy falls since people are avoiding the borrowing since servicing of the debt is more expensive. For this reason, the consumer demand is reduced. However, the returns on savings are high when the interest rates are high, thus, investors saves more and invests less. At higher interest rate, the mortgage interest is high causing a rise in the prices of houses (Simon, 2015). Consequently the demand for houses falls. Similarly, at lower interest rate, the mortgage interest is low which makes the price of houses to fall. According to Koukoulas (2015) and Business.uq.edu.au. (2014), the housing prices is Australia stopped rising and investors was uncertain whether this was the beginning of the collapse of this market.

Millar (2016) noted that sustained low interest rate has raised the affordability of houses due to capital availability and this has resulted in a rampant fuelling of the Australian property market. She noted that the Australians have a natural appetite for properties. However, she questioned the sustainability of this growth in the Australian property market owing to the global unrest, the end of the mining boom and the slowing of the Chinese economy. She also noted that there is a fall in the prices of commodities on the board and thus a widespread in the market instability.

 

Aims and Objectives

The major aim of this project is to determine the impacts caused to the Australian property market as a result of interest rate volatility. The objectives below indicates what the project is meant to achieve in line with the aim.

  • To identify the major impacts caused by interest rate volatility on the Australian property market.
  • To provide a basis in which the policy makers could make decisions regarding the restoring the prices of the Australian Properties when there is a volatility in interest rate.
  • To determine whether the rising prices of Australian properties are sustainable in future.

A Brief Methodology

In order to fully achieve the intended goals of this project, the following methodology will be used;

  • Literature review: The issue of volatility in interest rate and the impact on the housing prices have been experienced for many instances, there is therefore a significant information which has been put forward in explaining the same. This project will search for various theories that are related to these economic situations. The theories will over a simpler understanding of such changes. In the literature review part, this project shall consider not only the theoretical literature review, but it will also consider the empirical literature review. The empirical part will show how a similar situation such as that facing the Australian property market was experienced in maybe another economy; the resulting impacts will be analysed.
  • Research design and data collection: The research design to be used will be descriptive and will gather information on the current situation in the Australian property market. Quantitative techniques will be applied since historical data on the interest rate and prices will be gathered. Both primary and secondary data will facilitate this research. Questionnaires will be used in the collection of the primary data.
  • Data analysis and interpretation: There will be a regression analysis to determine whether the interest rate has a significant influence on the Australian property market. This analysis will help in giving an answer to the hypothesis that will be under test. Data will be analysed and interpreted. Conclusions and recommendations will be put forward. The importance of this research will be noted down and if there will be a deficiency in the research results, a research gap will be identified and noted down; thus, indicating a need for further research.
 

Bibliography

Brown, S. (2016). Australian Resi Property Market Update – April 2016 - Stanford Brown. Stanford Brown. Retrieved 5 April 2017, from https://stanfordbrown.com.au/australian-resi-property-market-update-april-2016/

Business.uq.edu.au. (2014). Is the house price bubble about to burst? | UQ Business School. Business.uq.edu.au. Retrieved 5 April 2017, from https://www.business.uq.edu.au/momentum/house-price-bubble-about-burst

Chande, M. (2015). The impact of interest rates on the property market. Property Week. Retrieved 4 April 2017, from https://www.propertyweek.com/opinion/the-impact-of-interest-rates-on-the-property-market/5077199.article.

Helliar, C. (2005). Interest Rate Risk Management. Burlington: Elsevier.

Koukoulas, S. (2015). We're almost certainly a million miles away from a house price collapse. ABC News. Retrieved 4 April 2017, from https://www.abc.net.au/news/2015-10-22/koukoulas-are-we-really-heading-for-a-house-price-collapse/6873812

Millar, S. (2016). Q&A: How will the global economy affect the housing market? - realestate.com.au. realestate.com.au. Retrieved 4 April 2017, from https://www.realestate.com.au/news/qa-how-will-the-global-economy-affect-the-housing-market/.

Oliver, S. (2015). Australian home prices and interest rates. Ampcapital.com.au. Retrieved 4 April 2017, from https://www.ampcapital.com.au/article-detail?alias=/olivers-insights/april-2015/australian-home-prices-and-interest-rates

Simon, J. (2015). Low Interest Rate Environments and Risk | Speeches | RBA. Reserve Bank of Australia. Retrieved 4 April 2017, from https://www.rba.gov.au/speeches/2015/sp-so-2015-10-08.html

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