5 year fixed rates thread

[WinstonWolfe]

Well, let's have a look at FHBs....

Av loan taken out recently across Aust by FHBs = 283k

Let's presume most went with a 25year P&I

Weekly $ repayments at
5% 382
6% 421 up 39
7% 462 up 80


pre tax dollars, at a marginal tax rate of 30%

5% $545
6% up 55
7% up 114


So a 2% rate rise will see half FHBs lose > $114 a week = 5928 a year
If the median income is 55,000 and the average FHB has 1.5 incomes
That's 82,500pa household income

2% rate rise pushes DSR up by 7.2% to 41.5%pa

With a 2% rate rise, at least half FHB households will need to be highly adaptable imho.

 

[keithj]

I diasgeree Keith that they have raised rates with rising unemployment before. I could be wrong but I dont remember that and articles I read reinforce my recollections..

Hmmm... I don't have references to hand. The ANZ job advert series is a good leading indicator for unemployment, the RBA no doubt watches that to attempt to preempt inflation.

We are 'front loading' so much expenditure now with capital allowances, FHOG, $900 stimulus now, .....what happens when this runs out in 3, 6 months? Who will be buying, building then.

• 'Normal' demand is expected to return.
• 2nd & 3rd round effects will occur - the money got spent somewhere, and will be spent by whoever received it,....
• The early signs are looking good - consumer & business confidence is up.
• The $900 stimulus was spent months ago, there's been consistent improvement since it was spent.

It is assummed China will pick up but exports here does not seem to have dropped much? How does that help workers at Holden and Ford to keep thier jobs? I dont think we are going to tank but it will be very brave RBA that raises rate with rising unemployment.

I'd agree that raising in the next few months wouldn't be wise. They more likely to raise the cash rate a little before unemployment peaks. And sometimes raising has a counter intuitive effect - people think maybe the RBA knows something we don't about how good the really economy is .

As well a huge number of FHO are going to "squeal like stuck pigs" when rates go up 1% mid 2010 and STOP spending accordingly so the direction of rate rise after the 1% is "hard to see" as Yoda would say.

Sure... it's a fine line. IMO the RBA did a good job over the last cycle.... maybe they'll pull it off again ? And they don't care especially about squealing pigs. Those FHOs (who didn't fix their rate) will hopefully be back working 40 hours a week, and can even put in for a couple of extra shifts if they still want their annual O/S holiday & new wheels, till their next annual pay review.

Cheers Keith

 

[Rixter]

So rates need to really rise and fast for fixing to be worthwhile ATM and to those on 4.99% for three years, BRAVO! I think you won this challenge

In the words of the king (the real one)....thankyou, thankyou very much!

(elvis has left the building)

 

[Perth Investor]

Well, let's have a look at FHBs....

With a 2% rate rise, at least half FHB households will need to be highly adaptable imho.

Unless that rise takes 2 years and your first home buyers (young 'uns starting their careers) can manage to get 3.5% pa in payrises, in which case they will actually have more cashflow, and be paying 7% interest...

Yes, that's right, their income will have to rise with inflation to be able to meet a 2% point increase in interest rates...

 

[Peter 14.7]

A 3.5% rise is not much when your on $34k pa. I have family who are FHO candidates and that what he earns in his 30's. He is not dumb but simply stuck in a no-where job. Drives the obligatory 10 year old COmmodore, always broken down but seems to have plenty of money for his JackD and Coke.

Bought and new PC and TV in the last six mnths with his $900's so I dont see anyone except Chinese manufacturers respending that cash.

Peter

 

[Peter 14.7]

http://business.theage.com.au/busin...nterest-rate-rises-20090723-duir.html?page=-1

Pretty much sums up where we are at, and exert is:

''My best policy summary is that the RBA is firmly on-hold at 3 per cent for the foreseeable future and we can only guess whether the next move is up or down," said Macquarie interest rate strategist Rory Robertson.

He said if unemployment peaks near 7 to 7.5 per cent ''then we could easily be looking at rate hikes next year''.

"Alternatively, if things don't go quite so well, and unemployment continues to head towards 8 per cent or 9 per cent, then the outlook for RBA cash (rate) will remain flat or down for the foreseeable future.''

A overlooked factor is the political considerations..

Labour wants the next Fed Election now, to win well and avoid have to face the people in 12 months when the extra taxes to repay the debt, rates have rises and jobs are being lost. RBA will be "encouraged" to hold any rise to after that.

FYI here is really good read on the politics and past history.

http://www.treasurer.gov.au/Display...09/003.htm&pageID=004&min=njsa&Year=&DocType=

Peter

 

[Perth Investor]

A 3.5% rise is not much when your on $34k pa.
Peter

Granted but I was replying specifically to WW's post which was using an example of a couple on $82.5K pa. The idea was that in this instance a 2% rise over two years would essentially be negated by 3.5% increases in wages.

It was a very simple analogy with plenty of flaws, but I wanted to bring balance to WW's analogy and look at it from a different angle. And your friend above maybe a FHO candidate, but he definitely isn't a candidate for WW's $283K loan...

 

[Perth Investor]

It was the median analogy, rather it was slanted generously towards FHBs as most wouldn't have a median income.

Let's see your calcs showing inflation indexed wage rises more than match the additional interest.

I agree that you were being generous with the income to the first home buyer. I suppose my point is that most first home buyers would buy their home at a stretch on a much lower income, but (and this depends hugely on the individual and their job...) they could expect that income to rise as they get promotions, move up the rung etc.

But to your specific question about the calculation, $82,500 X 3.5% X 2 = $5775. So that's a $5775 increase in wages at roughly inflation over two years, which is $111 per week, which covers the increased interest rate of 2%. Of course it doesn't help you live, but like I said, I'm keeping this pretty simple.

However in my experience most of those $283K loans are going to individuals / couples on probably $60K, not $85K, and if they are in white collar jobs, or are doing traineeships / apprenticeships, they could reasonably expect that wage to increase over 5 years by much more than inflation. i.e. they would start at well below the average wage, and work their way towards it, which requires increases above inflation.

I don't make guesses about where property prices will be, but I think the "First home owner time bomb" is overplayed, unless unemployment climbs dramatically, then all bets are off. On average first home buyers will get better payrises over a period than senior workers, due to them being green and gaining knowledge and skills quickly.

 

[WinstonWolfe]

But to your specific question about the calculation, $82,500 X 3.5% X 2 = $5775. So that's a $5775 increase in wages at roughly inflation over two years, which is $111 per week, which covers the increased interest rate of 2%. Of course it doesn't help you live, but like I said, I'm keeping this pretty simple.

Rework $111 a week over 2 years, not one.

 

[sash]

That is a very insightful statement....unfortunately....you will find that Winston likes to point ot pretty charts of yester year....1950s in facts!

I don't make guesses about where property prices will be, but I think the "First home owner time bomb" is overplayed, unless unemployment climbs dramatically, then all bets are off. On average first home buyers will get better payrises over a period than senior workers, due to them being green and gaining knowledge and skills quickly.

 

[Peter 14.7]

A overlooked factor is the politica...input of the downturn of employment? Peter

 

[bigbucks]

i dont know if any bank offers 100% offset on fixed terms ?

 

[Ross]

Adelaide bank does, I fixed back in April with them on my 3 loans all off which have an offset

 

[WinstonWolfe]

It is clear that the government's bonus tax depreciation on cars created a demand that simply did not continue. Demand was simply brought forward. My car dealer friend is hoping to get another sales spurt in December when the 50 per cent bonus depreciation for small enterprises comes to an end. After that it may be all down hill.

Now we may start to see the true input of the downturn of employment?

Peter

Gotliebsen is a bit of a bear, but I reckon his car dealer mate is calling it right. The June spike is not only the usual seasonal effect, but additional demand brought forward.

Incidentally, a well connected friend was saying the car bonus was funded by tax revenue on additional iron ore and coal sales to China, who had additional demand from the Japanese car manufacturers we buy cars from.

 

[keithj]

It is clear that the government's bonus tax depreciation on cars created a demand that simply did not continue. Demand was simply brought forward. My car dealer friend is hoping to get another sales spurt in December when the 50 per cent bonus depreciation for small enterprises comes to an end. After that it may be all down hill.

Kohler is a bit of a bear too..... but his car dealer mate doesn't agree....

Yesterday my colleague Robert Gottliebsen talked about a car dealer whose sales have slumped following the end of the financial year because the bonus depreciation brought sales forward into June.

But then later yesterday, another car dealer wrote to me saying that he had cut his staff permanently from 600 to 550 by “getting rid of the drones”. “In good times we got slack,” he added, so he’s putting it all in a journal for his children. So while sales may be soft, he says, profits have never been better.

And Stevens speech today has caused yields to move up again...... the markets are expecting more rises sooner, and a full 1% rise within 12 months.

 

[Peter 14.7]

Hey Keith

I agree no-one will get rid of good workers and use this present "claytons recession" to let those dodgy emplyees go. As I employer, I understand, ... it is near impossible to sack someone for poor work without the risk of unfair dismissal, but it much easier to say cutbacks in profit, some must go

BUT that "positive report" is still 50 jobs gone, in an industry that is not going to go anywhere but backwards for six months from the reports. As a percentage, 8% of that workforce.

So if that is duplicated across Aust. then how many more jobs are going to go, now the money is running out? 1% rise in unemployment, 2%, 3%?

I agree we should be 1% higher in June 2010, but that is still only 6%. So consider this? How many investors are going to hit the market when rents are rising, prices are rising, confidence has returned and rates are all of 6%??? Heaps. IMP 50% of RE investors are lemmings, following the crowd. We could be in for boom and rates could really go up!!!

So perhaps you are right. Once we confirm we are not in W recession and no more rate drops, then the best 5 year deal (regardless of being say 7%) makes sense as when the average joes shift the masses of money into property, as happens most share market crashes, then the market could/should boom, and rates will follow.

Yes, I am confused too, Peter:

 

[keithj]

I agree no-one will get rid of good workers and use this present "claytons recession" to let those dodgy emplyees go. As I employer, I understand, ... it is near impossible to sack someone for poor work without the risk of unfair dismissal, but it much easier to say cutbacks in profit, some must go

.... I too know of several employers that have seized the opportunity 'to let people go' .

BUT that "positive report" is still 50 jobs gone, in an industry that is not going to go anywhere but backwards for six months from the reports. As a percentage, 8% of that workforce.

So if that is duplicated across Aust. then how many more jobs are going to go, now the money is running out? 1% rise in unemployment, 2%, 3%?

The unproductive ones have got the flick, the good ones may have had their hours cut.... no great loss.

I agree we should be 1% higher in June 2010, but that is still only 6%. So consider this? How many investors are going to hit the market when rents are rising, prices are rising, confidence has returned and rates are all of 6%??? Heaps. IMP 50% of RE investors are lemmings, following the crowd. We could be in for boom and rates could really go up!!!

I'm getting the feeling that we have a 6 month window of opportunity, before the lemmings realise that a 'W' is less likely, IRs rise, and the risk of unemployment diminishes

I also get the feeling that all fixed rates will sneak up another 0.1%-0.4% over the next 2-3 months.

Cheers Keith

 

[WinstonWolfe]

The most important part of Glenn Stevens talk was typically left to last.

It's a sign of his hypocrisy, arrogance, and intellectual sloth, that he didn't see the trouble brewing before now, as prices escalated to 8x median income when he was arguing it was all kosher.


The pace of global growth, and the easy availability of credit, seen in the period up to 2007 was not the norm. It is unlikely to be seen again any time soon. The path to economic health for the major countries of the world will still be a difficult one, because the legacy of the crisis will cast a shadow for some time. Major international banks will remain diminished in stature and balance sheet capability, and will be required to devote more capital to their strategies in the future. If global regulators have their way, the world will be characterised by less leverage, and scarcer and more expensive credit, than in the earlier period. We here in Australia have to accept that fact and accommodate it in our thinking.

One thing this presumably means is that the prominence of household demand in driving the expansion from the mid 1990s to the mid 2000s should not be expected to recur in the next upswing. The rise in household leverage, the much lower rate of saving out of current income, and the rise in asset values we saw since the mid 1990s, are far more likely to have been features of a one-time adjustment, albeit a fairly drawn‑out one, than of a permanent trend. Moreover the risks associated with those trends going too far are apparent from events in other countries. These risks have been reasonably contained so far in Australia – but it would be prudent not to push our luck here.

A very real challenge in the near term is the following: how to ensure that the ready availability and low cost of housing finance is translated into more dwellings, not just higher prices. Given the circumstances – the economy moving to a position of less than full employment, with labour shortages lessening and reduced pressure on prices for raw material inputs – this ought to be the time when we can add to the dwelling stock without a major run‑up in prices. If we fail to do that – if all we end up with is higher prices and not many more dwellings – then it will be very disappointing, indeed quite disturbing. Not only would it confirm that there are serious supply-side impediments to producing one of the things that previous generations of Australians have taken for granted, namely affordable shelter, it would also pose elevated risks of problems of over‑leverage and asset price deflation down the track.

Over the medium term, the emergence of China (and other countries such as India) will continue, and will offer opportunities for Australia. Plenty of observers, the RBA among them, have been saying this for years. But China’s emergence also presents challenges. If commodity prices do stay at their current relatively high levels on the back of strong emerging world demand, the mineral extraction sector and all those parts of the Australian economy that service it and feel its flow‑on effects, will expand. Other sectors will, relatively, contract over time. That is to say, the structural adjustment issues that faced us a year and a half ago, and which have received less attention since then, would resume. These sorts of adjustment in the economy have industrial, geographical and social dimensions.

Moreover, if we are more integrated into China’s expansion, we will be similarly more exposed to the consequences of whatever might go wrong in that country. So our understanding of how the Chinese economy works, and of what risks may be accumulating there, will need continual work.

 

[HiEquity]

Not only would it confirm that there are serious supply-side impediments to producing one of the things that previous generations of Australians have taken for granted, namely affordable shelter, it would also pose elevated risks of problems of over‑leverage and asset price deflation down the track

Unfortunately there is not much Mr Stevens can do about this problem - if he raises rates less housing will get built. If he lowers them it is most likely to mainly flow into asset prices with little stock actually being built, creating a worse problem than we had before...

The supply side impediments he refers to are the real problem and he has no control over the miasma of Australia's local, State and Federal govts in this regard. They are showing no sign of coordinating a reduction in their restrictive supply side policies / taxes.

So that thing we Ozzies have taken for granted for so long looks pretty likely to be coming to an end! Ownership of housing will only increase the social divide between the haves and have nots as increasing rents capture more in the poverty trap... I know which side of that trap I want my family to be...

Back on topic, I reckon Mr Stevens is back to his old tricks - talk up interest rates to get people to be as conservative as possible with their leverage while actually leaving them as low as possible so as not to kill the economy - he is becoming pretty good at it now! Nevertheless equity markets are on fire so the risk of IRs rising is increasing every day...

So our understanding of how the Chinese economy works, and of what risks may be accumulating there, will need continual work.

Agreed - there are a great many risks in hitching a ride with a one party state that shows little regard for human rights. It's all very nice while everyone else has turned to pot but you would do well to avoid getting too close...

 

[WinstonWolfe]

Agreed - there are a great many risks in hitching a ride with a one party state that shows little regard for human rights. It's all very nice while everyone else has turned to pot but you would do well to avoid getting too close...

Interestingly, China is comfortable with its dramatic increase in leverage being used to inflate property and equity prices. They appreciate rising property prices make people feel wealthier which encourages household consumption, which drives the domestic economy.

Unfortunately, as Australia is finding out, escalating property prices can't fuel consumption ad infinitum, so they'll have to find a smarter way to boost domestic consumption.....

But at least they have a current account surplus and 2.2Tusd fx reserves to cover their 335Busd foreign debt. We've got a current account deficit, and 48B fx to cover our 675B debt.