Low interest encourages risk-taking - but be prepared

If you have savings on hand, where's the best place to put the money?

According to a closely watched survey, more and more Australians are reaching a similar conclusion. Forget paying down debt, we are apparently thinking, plough the money into real estate.

This week's graph highlights the changing of the guard between these two priorities.

Indeed, the share of respondents to the Westpac Melbourne Institute index of consumer sentiment who reckon real estate is the "wisest" place to put their savings has increased to its highest level since 2003.

Paying down debt, meanwhile, is going out of fashion fast. The pattern emerging is pretty clear: people are taking more financial risk.

So should we be concerned by this shift away from conservatism?

At this stage the trend isn't setting off alarm bells.

However, experts say consumers should make sure they understand any extra risks they are taking. Decisions may be distorted by the lowest interest rates in decades.

It's easy to see why more and more people may be less keen to pay off their debts and take more risk in the current environment.

After tax and inflation are taken into account, returns from many term deposits are actually negative for people on the top two tax brackets. And borrowing money to invest in the resurgent property market has rarely been cheaper.

In part, this is what is meant to happen.

In dropping the cash rate to a record low of 2.5 per cent, the Reserve Bank is seeking to encourage people to take more risk.

But the thing about very low interest rates is that they will eventually rise. And anyone investing in real estate with borrowed money - most property investors - should be prepared for the day when monthly loan repayments increase. No one knows when this will be, but a growing number of market economists think the Reserve Bank may start lifting the cash rate some time next year.

So property investors should make sure they would still be able to afford repayments if rates were notably higher than they are today.

It's also worth bearing in mind that Australian households as a whole are already carrying plenty of debt, despite being more conservative in recent years.

The ratio of household debt to disposable income has come in a tad from 153 per cent before the GFC to 148 per cent today, but it's still higher than most other countries.

Taking a bit more risk is a natural response to cheap money, but don't assume ultra low borrowing costs will last forever.

Debt vs real estate