Rises of Interest Rate is Affecting the Housing Affordability Essay

Rises of Interest Rate is Affecting the Housing Affordability - Essay Example As the interest rates rise, the mortgage payments amounts also escalate. This poses as an unfavourable situation for the homebuyers, and causes a decline in the housing affordability. Empirical evidence suggests that this has been the case in the years whenever the interest rates rose. When such is the situation, the homebuyers can be offered such financial products by the banking sector that they can conveniently make the home buying decision, thus supporting the housing affordability. The huge majority of Australians desire to own a home and housing assets form the leading fraction of wealth for a good number of Australians. Australian house prices have been mounting discordantly in recent times. This price growth has been well in surplus of average weekly earnings growth over the same period, and as such the ratio of house prices to average earnings is now soaring. The Australian property market is basically comprised of many markets of separate sectors and geographical locations. This is the fact that must be considered as many various forces may contribute in shifting prices in separate markets, and the overall Australian property market's price gains or falls may disguise the actual micro market price shifts. Residential housing is determined by two markedly separate sources of demand; owner-occupiers and owner-investors. Both sources of demand are determined by diverse (but connected) aspects and the payback that accrues to the owner can take a collection of shapes depending on their standing. Payback can be the accredited rent that owner-occupiers get hold of by living in a house, or it can be the takings resulting from renting out an investment property or it can be (in both cases) the capital gain that is realised upon selling of the hothirty percent of income. The level of nominal interest rates and their rate of change are major determinants of the demand for home finance, along with levels of consumer confidence. (http://www.dhw.wa.gov.au/housingstrategywa/hswa_finance.pdf) Affordability of access and servicing of payments becomes an increasing issue as interest rates rise. Any rise in interest rates is probable to upset borrowers with diminutive equity and make it further difficult for would-be first homebuyers. Simply speaking, housing finance is the system of money and credit that works to offer housing affordability. In that sense, it is quite similar to finance for any other shape of investment. The established level of interest rate also affects the demand for and supply of home finance. The customary economic conditions very much affect the interest rates, over which the housing sector has very little control. Research Questions Aims and Purpose This research paper will aim to provide an insight to the effect of a rise in interest rates on the housing affordability of Australia. The close link of these two aspects, that is the interest rate levels and the housing affordability will be proved and the various other driving forces will be identified. The historical data and figures will be used to establish the empirical trend. In addition, why such a link exists and what are the reasons that the housing affordability is connected to the prevailing levels of interest rates will be illustrated in this paper. Objectives This