Biggest Interest rate rise in a decade forecast.

[The_Bludger]

Sure to scare a few people off. What are your thoughts?

Might be a good time to buy during the "panic" phase.

http://www.theage.com.au/business/cup-day-tip--big-rate-rise-20091020-h6xq.html

 

[marg4000]

The biggest interest rate rise I have experienced in one hit is 2%.

I don't think .5% will "panic" anyone over about 35-40 years of age - we have seen it all before.
Marg

 

[Aaron Sice]

what? 0.5%?

so bluddy what?

 

[Sheryn]

Gosh I remember when we were paying 17% IR

 

[boz]

The biggest interest rate rise I have experienced in one hit is 2%.

I don't think .5% will "panic" anyone over about 35-40 years of age - we have seen it all before.
Marg

we still consider the average mortgage these days is over 270k$ (never seen it before, even when measured against wages and gdp), average new mortgage is over 350k$. Probably, last time there was 2% rate rise the average mortgage wasn't even 100k, I don't believe there will be panic but I believe that if RBA want to have total mortgage value amount reduction in australia they'll eventually succeed.

 

[marg4000]

we still consider the average mortgage these days is over 270k$ (never seen it before, even when measured against wages and gdp), average new mortgage is over 350k$. Probably, last time there was 2% rate rise the average mortgage wasn't even 100k, I don't believe there will be panic but I believe that if RBA want to have total mortgage value amount reduction in australia they'll eventually succeed.

No, the average mortgage was far lower than $270K, but so were wages. Loans were much harder to get and affordability was a problem.

Our first home cost around $22K. It took us THREE YEARS to save the deposit, about average for those days when you needed a hefty deposit before you were even considered for a loan.

The figures may sound laughable in today's terms, but believe me it was just as hard to get a home and pay off a mortgage then as it is today.
Marg

 

[willair]

Sure to scare a few people off. What are your thoughts?

Might be a good time to buy during the "panic" phase.

http://www.theage.com.au/business/cup-day-tip--big-rate-rise-20091020-h6xq.html

Would depend on how everyone understands the "Panic Phase" and why it may happen,interest rates hikes by the Reserve Bank?,Median property prices dropping for three months in a row?,Tax changes to depreciation
claims?,A out of nowhere serious "BLACK SWAN" political crisis that no one saw coming?,property spruikers -get rick quick-fast bucks-artists will tell you upfront that it never will happen,one item i'm watching is the sales volumes in the so called bulletproof middle and high end small pockets in inner Brisbane and what builders tell me,for the normal person who owns their house in Australia it's not going to worry them 1%, for investors it may well be a different story,and even then it would take 6-9 months
after the media spinners have their way,but one item always stands out rubbish is rubbish no matter what ever the market is doing,i look at in a very simple way not long ago you could have bought into several high end "Banks" for 50% less then their previous value,and some people tell me they think the same will happen to property prices over a 5 year period,myself i don't care less ,,imho,,
,,willair,,

 

[boz]

No, the average mortgage was far lower than $270K, but so were wages. Loans were much harder to get and affordability was a problem.

Our first home cost around $22K. It took us THREE YEARS to save the deposit, about average for those days when you needed a hefty deposit before you were even considered for a loan.

The figures may sound laughable in today's terms, but believe me it was just as hard to get a home and pay off a mortgage then as it is today.
Marg

there is a lot of data and numbers on this matter, none can argue that home prices/wages in australia has never been higher then now, also none can argue mortgage debt/gdp of around 100% has never been higher before.
On the other hand many argue that now most of families can service morgages with 2 wages (while on the past only one member was working) and it is true it is easier to get a mortgage and interest rates are far lower then in the past. Still, a 0.5% increase in mortgage rates have more impact now then in the past. But we have to keep in mind that RBA decide the impact they want on the economy first and then act on rates. It is not that at present rate increase and decrease have any other scope then impacting on lending.

 

[Aaron Sice]

.......until one of them gets pregnant.....

 

[JulieW]

Something to bear in mind.

http://www.youtube.com/watch?v=akVL7QY0S8A
(skip the intro - a bit long)

I doubt our story is much different overall in the timeframe shown.

If I was half of a 2 income stream I'd ponder the implications of this research for my future plans.

Essence is Economics 101 proved. Increased income means increased consumption and increased debt being the danger.

 

[boz]

Essence is Economics 101 proved. Increased income means increased consumption and increased debt being the danger.

Wouldn't be a problem if debt would grow at same pace as increase income but it is at exponential growth when measured against gdp (which is the gross domestic product and measure all final goods and services made within the borders of a country in a year).
here is the chart (it is a bit outdated and got significantly worse in the last few months..):

 

[keithj]

On the other hand many argue that now most of families can service morgages with 2 wages (while on the past only one member was working) and it is true it is easier to get a mortgage and interest rates are far lower then in the past.

I think that's the point - debt is now relatively higher than at any time in history & growing exponentially. However, serviceability has also been growing at the same rate, so we can continue to afford our expensive(?) houses.

Showing debt against GDP shows some scary exponential graphs, however, plotting discretionary income growth (ie serviceability) against mortgage debt paints a realistic picture.

 

[boz]

Showing debt against GDP shows some scary exponential graphs, however, plotting discretionary income growth (ie serviceability) against mortgage debt paints a realistic picture.

the discretionary income growth is a good way to explain why the economy is in equilibrium now and why gdp has been growing strong for long time.
But discretionary income growth is not a good way to measure anything with reliability as it is a very unreliable and instable way of measuring things.
Infact disc income change automatically at any RBA interest rate decision, it changes at every currency movement (import cheaper or more expensive). GDP doesn't change and move as easily as discretionary income.
Have a look at the Iceland example, when they implode on the weight of foreign debt they discretionary income massively change pretty much overnight, so, looking and analyising at their discretionary income was pointless to forecast their future

 

[chilliaa]

I think that's the point - debt is now relatively higher than at any time in history & growing exponentially. However, serviceability has also been growing at the same rate, so we can continue to afford our expensive(?) houses.

Showing debt against GDP shows some scary exponential graphs, however, plotting discretionary income growth (ie serviceability) against mortgage debt paints a realistic picture.

This is a very good point in my opinion and one which is not reflected in 'historical macro' statistics.

However its also a bit of a double edged sword.
The creation of that second income significantly increased total family discretionary income, but this is now pretty much factored into current 'prices'.

So whats the catalyst to provide the next big jump in family discretionary income?
kick the kids off to work when they are in their teens so they can help pay the mortgage??

interest rates? they have been on a decline since the 1970's (yes up and down during this time, but overall trend has been down). In the US Fed rates are zero (and the RBA got to 3%), you cant trend down much more than this.

I do note however that over time the underlying land value, especially in inner capital cities will continue to appreciate over the long term as populations increase and the land use becomes more efficient (ie subdivision).

But i can nearly guarantee you it wont be as smooth a progression as we have seen over the last 15 years. Therefore i cannot emphasis strongly enough that risk levels will need to be set at a lower level than what could have been accomodated in the last 15yrs.

There is no point holding for the long term, if your risk level is such that you run a high probability of blowing up before you reach the 'end of your long term'.

 

[keithj]

the discretionary income growth is a good way to explain why the economy is in equilibrium now and why gdp has been growing strong for long time.
But discretionary income growth is not a good way to measure anything with reliability as it is a very unreliable and instable way of measuring things.

Why ? Isn't it simply a function wages growth and inflation ?

In fact disc income change automatically at any RBA interest rate decision, it changes at every currency movement (import cheaper or more expensive). GDP doesn't change and move as easily as discretionary income.

I agree that IRs & exchange rates will change discretionary income. But they have a relatively small influence. Only 10% of total income goes towards housing (rent & P&I), so a change in IRs has a small effect. And exchange rates have varied by 50% over the last 15 yrs with little effect on trend discretionary income.

Have a look at the Iceland example, when they implode on the weight of foreign debt they discretionary income massively change pretty much overnight, so, looking and analyising at their discretionary income was pointless to forecast their future

Not sure how this is relevant. Are you saying cost of foreign debt changed discretionary income or vice versa ?

I'd agree if the O/S lenders lost confidence in our ability to repay the loans, refused to renew them or applied exorbitant rates, then our IRs would rise significantly & then our discretionary income would fall. However, we do have the ability to service the loans (thanks WA), because our discretionary income is growing sufficiently in proportion to mortgage debt. When the dirt runs out in 300 years, then we may have a problem (assuming nothing else changes).

 

[keithj]

The creation of that second income significantly increased total family discretionary income, but this is now pretty much factored into current 'prices'.

So whats the catalyst to provide the next big jump in family discretionary income?
kick the kids off to work when they are in their teens so they can help pay the mortgage??

Probably a topic worthy of a new thread .

See What's the catalyst to provide the next big jump in family discretionary income?

 

[boz]

Why ? Isn't it simply a function wages growth and inflation ?

the long extremely important factor that is in function of wages and inflation is productivity (is also a function of progress and unemployment rate)
I agree that IRs & exchange rates will change discretionary income. But they have a relatively small influence. Only 10% of total income goes towards housing (rent & P&I), so a change in IRs has a small effect. And exchange rates have varied by 50% over the last 15 yrs with little effect on trend discretionary income.

Not sure how this is relevant. Are you saying cost of foreign debt changed discretionary income or vice versa ?
Iceland disposable income slumped because of drop in the exchange rate that got everything they imported unaffordable (same thing can happen to australia as we pretty much import everything of everyday use), theur disposable income dropped also because foreigners stop lending to them, the source of all this was a huge foreign debt (in relation to gdp)

I'd agree if the O/S lenders lost confidence in our ability to repay the loans, refused to renew them or applied exorbitant rates, then our IRs would rise significantly & then our discretionary income would fall. However, we do have the ability to service the loans (thanks WA), because our discretionary income is growing sufficiently in proportion to mortgage debt. When the dirt runs out in 300 years, then we may have a problem (assuming nothing else changes).

as I said this explain the present situation, but there are country like Russia and Argentina that had plenty of resources and they still run into trouble. but at the present is all good and could last many years in the future

 

[Ms Jade]

I was in the fortunate position yesterday of attending an interesting speech by the RBA's Head of Regional & Industry Analysis. Though the story from the RBA was decidedly upbeat regarding Australia's position it was not exactly all beer & skittles. The rise in house prices was mentioned as a positive indicator and I didn't get the impression that he thought that the market was overheated at all, nor that it was a danger. The greater rise in apartment prices was put down to the dearth of supply coming on line. The RBA knows that this is due in large part to the banks not funding the developments. They are also watching the poor data on commercial building stats and are concerned that building is only holding up thanks to the stimulus (schools etc). There is still some structural weakness and they seem cognisant of the risks of hiking too fast & destabilising the recovery.

My impression is that he was cautiously optimistic whilst acknowledging that business investment is not really in a position to handle rapid rate rises (having had only half of the IR falls passed on). ACCI and other industry groups have certainly told the Bank that this month's 0.25% rise was premature. The RBA knows that only strong growth in the private sector will guarantee a sustained recovery and it should be said that, though not officially part of the RBA's agenda, it does have an eye on the $Au. Barring some extreme change in circumstances between now and then, I can't see mortgage IRs at anything close to 8% in 2010.
Then again, perhaps Glenn Stevens does have a fixation on housing finance as the prime economic lever in this country. We seem to as PIs, as does the media, but I suspect that the RBA is really looking at a broader economy.

 

[JulieW]

I'd agree. I think that though they may wish to raise IRs to cool housing the consequences elsewhere would be too negative. It also does Australia no good to be pushing up interest rates and pumping the dollar.

The largest danger I see is that with the AUD so strong, retail is set to boom at Xmas with credit cards grabbing super cheap imports. Our household debt levels will make for a very fragile economy if external economies pull back on commodities consumption in 2010.

There are a lot more factors involved of course, but politics is politics and it isn't just homeowners who have political opinions about interest rates. See the G20 positions for example and they were not too happy about the last IR rise here.

I think that's called my 2c

 

[Aaron Sice]

as I said this explain the present situation, but there are country like Russia and Argentina that had plenty of resources and they still run into trouble. but at the present is all good and could last many years in the future

Russia is a political train wreck run by drunken egomaniacs (literally....) and Argentina lacks any kind of non-corrupt govt officials to even contemplate competing on the world stage. Argentina's national slogan is "by the will, or by the force".....what does that tell you?

are you seriously comparing Russia and Argentina to Australia....?

IMPO - variable rate of 7 and 8 percent by end 2010 would KILL any recovering economy we have left.

7-8% in 2012-13 - absolutley.