Economic and Legal Context for Financial Planning

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Question 1

1. Is she able to buy her own property? 

Because of the raise in the US interest rate, Janes' objective is that it will buy a property of its own. Interest rate is a key factor in property cycles, which is why it is crucial for prospective home purchasers, such as Jane, to keep a close eye on which and where interest rates are. So it is impossible for Jane to purchase her own home in the event of US interest rates rising.

Potential impacts:

  1. The first potential impact is that the U.S. Federal Reserve system is the most important reserve currency in the world, implying minor shifts in "the Fed" can have consequences across the world, particularly in regards to increases in interest rates. When interest rates in the States increase, Aussie banks must do the same to have sustainable pricing. The effect for Aussies is higher interest costs, financial risks and higher mortgage prices. This implies that Aussie homeowners will face difficulty in buying property and homes of their own and Jane will also face the similar effect that make her difficult to buy her own property.
  2. The second potential impact is that for Australia, increasing US interest rates are great option as they reflect a rapidly expanding economy that has significant spill over effect on world and Aussie prosperity. An increasing US interest rate also places the Reserve Bank of Australia (RBA) under threat to lift the cash rate. The RBA has, nevertheless, strongly shown that the Australian cash rate will not shift in lock-step with the US rate, and there is still surplus room on the Australian labor market currently. This contributed to decreasing wage growth and inflation below the medium-term target of the RBA. This situation will increase the rates of the property therefore, Jane will face bit difficulty in buying her own property because of high prices.

2. Is it the right time to buy a property? 

If interest rates rise, buyers such as Jane will be more reluctant to take the requisite mortgages to access the property market.

Potential impacts:

  1. Considering the second objective, the first potential impact is that the US is not just a country, in terms of economics. It is the world's leading GDP economy, with the strength and weakness of the US dollar being the foundation for global banks. Whatever economically happening in the United States appears to spread across the globe. Higher US rates would make it costlier for the US dollar and less desirable for the Aussie dollar. This is the general impact that is shown when US interest rate rises. Ultimately, according to analysis, it is concluded that when US interest rates are rising then it is not a right time for Jane to buy a property in the Australia.
  2. The second potential is that interest rates and real estate values do not operate within a bubble, so all are affected by the wider country's economic aggregate strength or weakness. The US economy becomes much more competitive to foreign investors as US interest rates are higher and above Australian interest rates and the Australian dollar is therefore dropping in value compared to the US Dollar. Therefore, to do investment in the foreign country like Australia at the time when US interest rate are rising is not the right time. So Jane need to wait for a while otherwise, she might have to pay high for the property which she is willing to buy.

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