Interest rates - where are they heading?

[satanoperca]

But... my entire investment strategy and financial future is dependent on another massive and unsustainable property bubble! What will I do now??? :shake:

Leverage up again and buy more. Cannot loose.

The world has at least one more global stimulus package before debt saturation is reached.

Easy sailing.

Cheers

 

[trainspotter]

That's pretty silly, trainspotter. Rates have been extraordinarily low for some time. You can't reasonably expect them to stay there.
It might restore some sense of proportion if you consider that I and many others were a couple of decades ago paying 22% on mortgage on an IP.

Every time there's a change in interest rates, it's only ever reported from the standpoint of the borrowers. Might be nice to occasionally focus on those who have actually made the effort to save.

Dunno about extraordinarily low? Compared to what Australian history dictates then yes. Compared to the rest of the world then no. I too purchased my first IP when interest rates were at 17% (on the slide) but their were reasons for this to be occuring. Paul Keating was the Treasurer and he had his hands firmly on the levers of the Reserve Bank. Up went interest rates and OUT goes Bob Hawke. Brilliant tactics. Don't forget that Keating also deregulated the banks about the same time etc ... I could go on and on but I do not wish to bore the other ASFers. In other words there were OUTSIDE pressures on the reason as to why interest rates were at this pinnacle. Absolutely NO reason for them to be going up now IMO.

Japan at ... wait for it ... 0.1% YEPPERS ... POINT ONE OF A PERCENT and expected to stay at this rate. US Federal Reserve's 16 March meeting where they kept the fed funds rate unchanged at 0-0.25 per cent. YEPPERS .... POINT TWO FIVE OF A PERCENT.

And the RBA Governor comes out and basically says "The official cash rate will have a five in front of it before 2010 ends." YET .. the figures he is using to quantify this is the retail figures over the CHRISTMAS PERIOD. Oh dear, talk about navel gazing in reverse. Alice through the looking glass kinda stuff.

Interest rates going up is great for the ones who have cash and are not "borrowed" on the never never plan. It also means that a lot of people are out there doing it TOUGH and likely to sink slowly into the mire of debt burden. It also means that inflation is rising which means house prices are rising as well as the cost of living which has the knock on affect of Unions demanding more in wage rises blah blah blah.

I am all for interest rates rising in a TIMELY manner and not this knee jerk reactionary stuff we see happening right now. Talk about strangling the goose that laid the golden egg syndrome.

Rant over ....... normal transmission to resume.

 

[trainspotter]

I'm curious,

Which battler are you talking about, the one geared to the max with a string of IPs or the one with cash in the bank getting SFA in a term deposit, paying tax on it to rub salt into the wound.

The battler I refer to is the FHB who has embarked on his and her journey to financial freedom of buying their own home. The ones where he is a mechanic pulling about 38k a year and his partner being a hairdresser on about 28k a year. Wherby nearly 50% of their nett income is going on a mortgage to live the great Aussie dream of owning their own home. They are the battlers. They need interest rates going up like a hole in the head.

 

[Julia]

TS, interest rates such as you quote for the US and Japan are because the economies of both those countries are in dire straits.
No such situation here. On the contrary.

The 'battler' (jeez, I hate that expression: it's like "the workers" as though only people in blue collar jobs actually work) should have considered and allowed for interest rate rises if they bought via the FHB grant and at the time interest rates were at what the RB then described as emergency lows.

And btw the 22% I referred to was in NZ at the time, but yes it was a time of high inflation. Amazing capital gains on property in very short time.

 

[trainspotter]

Is it possible that this inflationary pressure is due to the Federal Government borrowing more money from overseas to fund the "stimulus" packages that they handed around like a drunken sailor on shore leave? If Australia’s productive capacity is fully stretched, any new government infrastructure investment financed out of borrowings will, if other policies remain unchanged, add to inflationary and interest rate pressures IMO.

The "battler" used to be me BTW. I started with nothing other than $500 in my bank account, a job and turned it into a house. The bank I borrowed the money from (Keystart - State Govt money) QUALIFIED me that I was eligible for this kind of loan. Inflationary pressures turned this simple little home into a tidy profit of 67k over 5 years. I was pretty happy with this RoR and used this money to go again. It is up the financial institutes to ensure that the DSR, UCI's and projected interest rates are withing their target range allowing them to loan the money to the "battler".

 

[drsmith]

And the RBA Governor comes out and basically says "The official cash rate will have a five in front of it before 2010 ends."

Where has he said this ?

 

[trainspotter]

In his statement, Stevens enumerated all that was good in the Australian economy. The labour market is good. "The rate of unemployment appears to have peaked at a much lower level than earlier expected." The business sector is good. "The process of business sector de-leveraging is moderating, with the pace of the decline in business credit lessening and indications that lenders are starting to become more willing to lend to some borrowers." Housing is good. "… the market for established dwellings is still characterised by considerable buoyancy."

The terms of trade are excellent. "Australia's terms of trade are rising, adding to incomes and fostering a build-up in investment in the resources sector. Under these conditions, output growth over the year ahead is likely to exceed that seen last year, even though the effects of earlier expansionary policy measures will be diminishing."

You got that? Output growth next year is likely to exceed last year's despite the diminishing effects of earlier expansionary measures.

Hence, "The Board judges that with growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average. Today's decision is a further step in that process." 4.25% current .... 5 % by years end ... wait and see !

 

[cutz]

Why don't they just get it over and done with by jacking up rates 50 points at a time, it's quite obvious we're in the middle of a housing bubble if to quote Trainspotter "a mechanic pulling about 38k a year and his partner being a hairdresser on about 28k a year" are in way over their heads out in the outer burbs.

 

[MR.]

Why don't they just get it over and done with by jacking up rates 50 points at a time, it's quite obvious we're in the middle of a housing bubble if to quote Trainspotter "a mechanic pulling about 38k a year and his partner being a hairdresser on about 28k a year" are in way over there heads out in the outer burbs.

Exactly, 4% decrease in rates and they have only recovered 1.25% to date. Should have increased by 50 points. Their slow return is making the bubble worse.

 

[drsmith]

Hence, "The Board judges that with growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average. Today's decision is a further step in that process." 4.25% current .... 5 % by years end ... wait and see !

So 5% is your forecast.

If conditions are sufficiently bouyant then that may be the case. I suspect 4.5% year end is still a possibility based on statements from a RBA board member in December last year (neutral is lower than it has been in the past as banks have lifted their margin on home loans). Household debt also remains at hisorically very high levels so small rises have a big impact. The RBA is well aware of this.

The battler I refer to is the FHB who has embarked on his and her journey to financial freedom of buying their own home. The ones where he is a mechanic pulling about 38k a year and his partner being a hairdresser on about 28k a year. Wherby nearly 50% of their nett income is going on a mortgage to live the great Aussie dream of owning their own home. They are the battlers. They need interest rates going up like a hole in the head.

Politically the prospect of a federal election later this year may also result in them being a little more cautious than they otherwise would have been. What happens afterwards though will be interesting. Battlers lured in with the increased FHB grant like the above could be in for a very hard time.

 

[MRC & Co]

Read the statement that accompanied the rise yday. If that's not hawkish, I don't know what is!

 

[trainspotter]

Read the statement that accompanied the rise yday. If that's not hawkish, I don't know what is!

Spot on MRC & Co. Just spot on !

 

[satanoperca]

Posted this in the property thread but here is also applicable.

Mortgage borrowers can absorb much higher interest rates, says Moody's

Moody's argues borrowers on a $300,000 mortgage would still be saving $415 a month compared to March 2008 when rates were at 7.25 per cent.

So no complaining, mortgagees have got it easy, they are actually saving money even with increases in IR's

http://www.theaustralian.com.au/business/city-beat/mortgage-borrowers-can-absorb-much-higher-interest-rates-says-moodys/story-fn4xq4v1-1225850875159

Cheers

 

[GumbyLearner]

Every time there's a change in interest rates, it's only ever reported from the standpoint of the borrowers. Might be nice to occasionally focus on those who have actually made the effort to save.

Good call Julia. Couldn't have come at a better time for savers. I look forward to more rate rises.

 

[Calliope]

MORTGAGE rates are predicted to hit a horror 10 per cent within the next two years as the Reserve Bank hikes rates to prevent runaway inflation.

There is little doubt that first home buyers who were motivated by first home buyers' grant and low interest rates will be defaulting on their payments in droves. They should come out OK providing they can unload their homes while the market is still strong. If the banks have to sell their homes they are in trouble. If house prices collapse we could see a repeat of The Lehman Bros. collapse.

"The makings are there for a repeat of the commodities boom that we saw between 2003 and 2008, and rates will likely hit, or exceed, previous highs in this cycle."

The news will strike terror in many homes, especially owners who stretched to afford a property when rates were at record lows last year.

If rates do hit 10 per cent, a borrower who took a $300,000 mortgage when rates bottomed at 5.75 per cent last year will see monthly repayments rise by $839 a month, from $1887 to $2726.

Even if rates hit 9.50 per cent, the same borrowers will see repayments rise by $734 a month.

Mortgage brokers have urged potential buyers to factor in at least another two percentage points of rate hikes into their calculations before deciding how much to borrow.

Modelling by Fujitsu Australia, which runs a "mortgage stress" index, suggests 1.1 million households will struggle with repayments if mortgage rates hit 10 per cent.

But it says house prices would be supported by almost-full employment and a continuing shortage of properties.

"Prices would only suffer a small fall, they wouldn't crash," said Martin North, director of Fujitsu Australia.

However, others warn the flood of first-home buyers - lured in by generous government incentives - will struggle so badly, they will be forced to sell, leading to a rapidly deflating property market.

AMP chief economist Shane Oliver said such high rates would lead to a big rise in delinquencies, and prices would fall by around 10 per cent

.

http://www.news.com.au/money/interest-rates-heading-for10-per-cent/story-e6frfmci-1225852259386

 

[georgey]

In NZ in 1988 my x and I bought a house on 21.5% rate and we just
managed to find one we could afford even with 2 incomes.
On hindsight, it's a safe way to get into debt because you are
restricted a lot, also, in those days a mortgage was based on only
one income, much safer than recently. Good luck to those now with a
huge mortgage based on 2 incomes and one loses their job while rates
rise.
I think bank deposits were about 15% at the time.

 

[SmellyTerror]

There is little doubt that first home buyers who were motivated by first home buyers' grant and low interest rates will be defaulting on their payments in droves. They should come out OK providing they can unload their homes while the market is still strong. If the banks have to sell their homes they are in trouble. If house prices collapse we could see a repeat of The Lehman Bros. collapse.

Good scare story!

1. Given that horror story of Lehmans and mass defaults, you'd think the RBA would be smarter than to bring about the downfall of Australian civilisation with massive interest rates.

2. "...owners who stretched to afford a property when rates were at record lows" are idiots. They're doomed. They are dead already and don't know it. They are too stupid to live, and no realistic RBA action will save them. They are economic food.

The fact that this government (and the last one) held their hand and led them to the cliff doesn't change the fact that they jumped off themselves.

 

[Dowdy]

I am all for interest rates rising in a TIMELY manner and not this knee jerk reactionary stuff we see happening right now. Talk about strangling the goose that laid the golden egg syndrome.

Rant over ....... normal transmission to resume.

Don't recall you saying anything when they dropped rates dramatically.

Raising rates .25 is not dramatic. What was dramatic was dropping them from 7 to 3%

 

[trainspotter]

Ummmmmmmm I wasn't a member of ASF when the rates dropped so a bit hard to make a judgement call on this one Dowdy. I never mentioned the word dramatic? I questioned the RBA call to raise rates 4 times in 5 meetings with rates likely to go higher in the very near future. 5% by the end of 2010 I believe I called? I am not seeing this wonderful economic recovery that the media is portraying and the sunshine and lollipops.

 

[trainspotter]

Demand for home loans continued to wane in February, even before the two latest interest rate increases, data released on Monday shows.

Just 50,287 mortgages were granted to owner-occupiers in February, down by a seasonally-adjusted 1.8 per cent compared to January, the fifth consecutive month of decline, Australian Bureau of Statistics data shows.

Economists' forecasts had centred on 1.0 per cent fall in February home loan commitments.

Last year's three interest rate rises and an end to the federal government's more generous first homebuyer grant at the end of 2009 were blamed for the steady drop-off in mortgage demand.

Hmmmmmmmm ........ sunshine and lollipops my gluteus maximus.