As you are now probably aware, the Reserve Bank did move to increase interest rates this morning. It stated that it was necessary due to a number of things, ranging form concerns about future inflation pressures and a need to reduce growth in the economy due to a lack of spare capacity which would in itself generate inflation pressures. I did not believe an interest rate increase at this time was needed and I am on the record as stating that rates this time around would not be increased. My reasons were that: 1.Our economy was and is slowing; 2.We are still in the inflation range the Reserve has been set as its targets and are not likely to move out of that range until 2006 or later given the slower growth in the economy; 3.The housing market was at or close to the bottom of its cycle and rate rises would make housing even more un-affordable than it has already become, further reducing demand. This could lead to a significant correction in the construction area of the market and harm an economy that has rightly or wrongly been benefiting from good employment in this sector. Additionally, there is one thing which I believe is often overlooked. A perception that the net asset backing of consumers, their house, is reducing in value makes them more conservative in their spending and, as a consequence, has a flow on impact throughout the economy. 4.Our currency has been appreciating and the impact on exporters has been significant and this fact would not be lost on anyone looking at our increasing negative balance of payments. An interest rate rise increases the positive differential between investing in Australian bonds and US bonds and, in my view, is more likely than not to strengthen our currency which had depreciated on news of the increasing trade deficit. This will make the negative trade balance even more difficult to manage. Clearly, the Reserve Bank has a very difficult position to manage. Consumers are spending too much and consumer debt on credit cards is growing too quickly, while exporters need the currency to fall in value. The housing market is at risk of coming away from its soft landing and turning nasty in our major capital cities where corrections have occurred if demand is reduced by any significant amount. An increase in rates may slow consumer activity but could strengthen the currency and harm exporters and take us closer to being a "banana republic". So what does it all mean for the housing market? We believe the typical borrowing in Sydney is in the order of $321,000. This means that the typical person will have an increase in loan repayments of $67 per month; Not really enough to cause a significant problem. As lower commitments will prevail in other states no forced sales are likely and it is unlikely that this rate increase is going to cause any increase in bank defaults. However, while loan repayments may not be affected majorly for now, a look at the effects over the last two years, we can see the problems this will cause. Looking at long-term affordability generally, we need to recognise the high levels of inaffordability has resulted from price increases in recent years. It was this inaffordability that caused the slowdown as a consequence of lower demand. This rate rise will make affordability worse, to state the obvious. In June 2003 the typical home loan repayment per month was $1,932 while after this increase it will be $2,379. Overall, we believe the increase will, in the short term, cause a lower level of demand and make the period of adjustment in the market slightly longer than we have been previously predicting. Our longer term predictions should hold. In the short term, this is definitely not a time to sell. The smart buyer will research well and pick off the bargains that will flow from a small number of forced sales. In buying, don't just use recent sales reports. You need reports like the Residex Property Explorer report so you can see the current day valu