Rising Rates Squeeze Owners

TWO years ago, when home mortgage interest rates slid to 12.5 percent, Wendy and Andrew Black bought a small inner city townhouse for US$99,500. Then the crunch came. In 1989 rates soared to the 17-18 percent range. The Black's payments on their variable rate loan shot up $383 per month. ``Andrew got a bonus and a pay rise, otherwise I don't know how we would have been able to cope,'' Mrs. Black says.

The record high interest rates come on the heels of a housing price boom. The median Sydney home cost $145,000 in February. (Sydney, the most popular market for immigrants, overseas investors, and corporations, is significantly more expensive than other urban centers.) Sydneysiders forked out a record 44.7 percent of their income on mortgage payments, according to Real Estate Institute of Australia data for the 1989 fourth quarter.

Forced sales are up. The Blacks are among those seeking to escape the inflated payments. Expecting a second child, they had always planned to move to a larger house. ``But the rise in rates has meant we've put our home on the market sooner than we would have,'' Mrs. Black says.

So far there have been few foreclosures. And government intervention has brought down rates - a little.

High interest rates figured prominently in last month's close election that returned Prime Minister Bob Hawke's Labor government for an unprecedented fourth term.

Labor is considered the more liberal of the two major parties in Australia. But during Mr. Hawke's seven years in office, the party has adopted many tough free-market measures advocated by the conservative coalition.

Australia has a $100 billion foreign debt and one of the largest trade deficits in the world. Hawke had squeezed credit to slow the boom in imports and bring the ballooning current account deficit under control.

Campaign promise

With a campaign promise on interest rates to fulfill, though, the freshly reelected government pressured the Australian Reserve Bank to relax credit. Technically, the bank is independent. But Treasurer Paul Keating regularly holds private ``consultations'' on rates with the bank's governor, a former member of Mr. Keating's team at Treasury.

On April 4 the Australian Reserve Bank cut its rate for overnight loans. Home mortgage rates have begun to ease. Over the next two weeks, most major banks will drop their home loan rates to 16.5 percent.

Rates are not likely to come down much further, bank economists say, until it is clear that the domestic economy has cooled. Some say the next drop will come after Christmas at the earliest.

The silver lining for potential home buyers is that the high rates have pushed down asking prices for housing. After jumping 60 percent in 1988, prices in Sydney over the last 12 months are down 19 percent in real terms, according to surveys by the Real Estate Institute.

New look at fixed rates

And buyers are giving fixed-rate mortgages a new look. ``When we buy our next home, we're going to get a fixed-interest rate mortgage, so at least we'll know where we are financially,'' Mrs. Black says.

Variable-rate mortgages have long been the standard in Australia. A debtor, commodity-dependent economy can produce wide swings in the Australian dollar and interest rates. This makes banks loath to lend for long terms at fixed rates.

``Have a look at our interest rate fluctuations over the last few years. You have to be very brave to gamble on fixed rates,'' says Bill Kemmery at the Real Estate Institute.

Until 1986, banks could not exceed a government-set ceiling on home mortgage loans. If market rates shot above the ceiling, the banks simply stopped lending. Now, in this deregulated market in an unprecedented period of high rates, the hot product is a 25- to 30-year home loan with a five-year fixed rate.

Last October, the Commonwealth Bank of Australia was the first to bring out this type of loan, fixed at 15.5 percent for five years. ``We were inundated'' by the demand, says David Hedgecoe, chief manager of lending services at Commonwealth. Little expecting that Australia will solve its foreign debt problems quickly, many home buyers were willing to bet that rates will not fall significantly below Commonwealth's during the next five years.