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Third time's a charm

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Rates are now at 6.25%, the highest they have been since 2000, and this month marks an embarrassing fourth hike since the 2004 election, which saw John Howard elected on the premise that he would keep interest rates low. Assuming the majority of lenders pass on the rate rise, the average standard variable rate will increase to 8.07%. And it couldn't have come at a worse time, particularly with Christmas next month, according to Ken Sayer, managing director of Mortgage House. "For many Australian families, this announcement will have a substantial effect on family budgets already dealing with higher petrol costs and the highest interest rates we've encountered in over five years," he said. Building and housing industry lobby groups are crying foul amid claims that a nail has effectively been hammered into the coffin of a housing market recovery in the eastern states. "The economic divide between the resource rich states and the rest of Australia has never been wider. Moreover, the latest rate increase will put further pressure on an already stretched rental market, with fewer investors likely to enter the market and existing landlords being given another green light to increase weekly rents," said Simon Tennant, Housing Industry Association executive director, housing and economics. But is it really that bad? Several commentators have argued that due to an almost certain outlook amongst the borrowing public of an impending rise before the end of 2006, the RBA's Melbourne Cup bonanza decision came as hardly surprising. Indeed, large numbers of borrowers, especially those who are highly geared and therefore sensitive to rate movements are likely to have already factored in another rate rise. The average mortgage holder now has to pay $40 per month in interest. Others argue that it is actually the investor who is emerging as an unexpected winner from these events. Eagerly scouring the market for bargains left by distressed vendors, large numbers of investors are eyeing current conditions with great interest as they prepare their re-entry. "A 25 basis point increase in interest rates will have only a minor affect on investor returns, and in most cases any increase will be significantly outweighed by the capital gain that can be made from buying at a major discount," said Andrew Donnelly, managing director of property research firm Branxton Chase.

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