Can interest rates really ever reach 15% + again??

[Chargin]

In my view, if mortgage interest rates ever went to the mid teens again it would be a disaster, bigger than anything weve seen.
Its obvious to everyone I guess but Ive only been looking at it lately. With house prices so high many home owners will have a very large amount on loan. 15%+ on 3-400k would kill most families. Back in '91 ish when rates hit 18% or so, I would guess most mortgages would be around 50k or so? That wouldnt have been such a big disaster, average wage might have been about 20-30k?

If the same truck hit us now wouldnt it mean absolute disaster?

Can that ever happen in a climate where house prices are 6-7 times median income?
Being a global economy, and being the only nation left with house prices so high (am I right there?) is there a possibility that the global money markets could push us to high interest?




PS Im thinking of going from a 50k mortgage to a 400k mortgage for the house of our dreams very shortly, I ponder this sort of stuff all the time heh, and yes I may fix some for 10 years..

 

[HomePage]

I read somewhere that interest rates over the last 50 years have averaged something like 8-9% so swings above that are certainly possible, especially if the inflation monster visits us again. If it goes that high again, then certainly there would be carnage on the streets of streets.

It's funny how we've grown accustomed to very low interest rates in the last few years and use that as the basis for affordability in the current market. Can it last?

 

[rugrat]

Of course it is possible that rates will rise that high again. Is it likely? I don't know. Not in the short / medium term - IMHO. Will it cripple me and my family financially? No, we would definitely be doing it really tight, I would probably even go out and find a fulltime job somewhere to give us extra money. But it wouldn't devastate us.

I am not running out and locking rates in just yet - I'll just continue making double mortgage repayments for now.

 

[weg]

The 17% interest rates we had were the equivalent to the 8.5% of last year except that it was not as prolonged.

Interest rates will only go that high again if that is what's required to put the breaks on the economy as opposed it crippling it.

With the debt level we have now I'd say the chance of that happening in the next to few years is highly unlikely.

 

[Bill.L]

Hi all,

Can interest rates really ever reach 15% + again??

absolutely.

With house prices so high many home owners will have a very large amount on loan. 15%+ on 3-400k would kill most families.

Ahhhh, the assumption that IR will go from 6% to 15% overnight, IMHO not a chance.

To get to 15% last time, interest rates started around 6% in the 'late 60's and moved up over 15 years until they first went to 15%. In that time, we started with low inflation, went to high inflation, then to moderate inflation.

When rates went to 18% the base they came off a couple of years before was ~14%. That is a 28% increase. What you are suggesting/asking between 6% and 15% is a 250% increase.

bye

 

[Pablo]

The 17% interest rates we had were the equivalent to the 8.5% of last year except that it was not as prolonged.

Why do you say this? Higher LVR's now?

 

[craigb]

plan for this , as best you can, remember we were all born naked with nothing and our knowledge along the ways would serve for a quick recovery,
they don't let people starve in this contry, and if it were to happen , you would'nt be the only one effected .

 

[keithj]

absolutely.

Ahhhh, the assumption that IR will go from 6% to 15% overnight, IMHO not a chance.

To get to 15% last time, interest rates started around 6% in the 'late 60's and moved up over 15 years until they first went to 15%. In that time, we started with low inflation, went to high inflation, then to moderate inflation.

When rates went to 18% the base they came off a couple of years before was ~14%. That is a 28% increase. What you are suggesting/asking between 6% and 15% is a 250% increase.

Excellent answer - I agree with it all.

Why do you say this? Higher LVR's now?

Yes. 10% today would cause the same pain as 17% did in the 90s.... and of course the RBA knows it.

 

[weg]

Why do you say this? Higher LVR's now?

As keith states the 8.5% achieved the same result as the 17% rate. The RBA only want to slow the economy.

It's often a fine line between high enough and too high an interest rate. The last thing the RBA want is for everyone to lose their home and business which is what 17% would do.

 

[housemute]

The RBA only want to slow the economy.

The last thing the RBA want is for everyone to lose their home and business which is what 17% would do.

The RBA doesn't control interest rates, they can only try and influence them. The price of money is subject to the laws of supply and demand...and if gov'ts around the world are all trying to get credit for their stimulus packages then they actually increasing demand which will increase the cost...

bond traders determine the rates, not the RBA

 

[Chargin]

The RBA doesn't control interest rates, they can only try and influence them. The price of money is subject to the laws of supply and demand...and if gov'ts around the world are all trying to get credit for their stimulus packages then they actually increasing demand which will increase the cost...

bond traders determine the rates, not the RBA

Yes thats kinda what I was thinking, we cant really control interest rates can we? Its a global market for money and wed just get pulled along with the current. You do see a big difference at times though huh between countries, like NZ right now has much higher interest rates than us in Aus I hear.

 

[weg]

I'm no economist but the RBA adjusts and sets the cash rate to maintain an optimum inflation target of between 2 and 3%.

My understanding is the the RBA's Monetary Policy has reasonable powers and control over the money markets relevant to it's aim and has been able to maintain it's objective to date.

Whether it gets it right everytime is another matter.

 

[Chargin]

But if the rest of the world is at high rates how can we avoid it? We're all tied to the same tree.

 

[sash]

Would not happen in the current environment....just look at what happened with the last rise. I think we went from something like 6.5% to almost 9%....but it took about 5 years. This represented about 2.5% IR rise or 40% increase to mortages.

Today households are more indebted so increasing from the current 5.1% IR to 7.2% should do the same trick.

Have a look at where most 5 year rates are....and that is where are rates likely to be at the peak! This also represents about a 40% increase to mortgage repayments.

I have paid between 0.18% and 0.64% premium on my two and three rates.

 

[Aaron Sice]

The RBA doesn't control interest rates, they can only try and influence them. The price of money is subject to the laws of supply and demand...and if gov'ts around the world are all trying to get credit for their stimulus packages then they actually increasing demand which will increase the cost...

bond traders determine the rates, not the RBA

and who manipulates the supply/demand chain?

 

[housemute]

and who manipulates the supply/demand chain?

Are you saying the Govt controls the supply and demand via the stimulus? Well if they want to reduce demand (and reduce pressure on rates) then that means no more stimulus packages, no more $900 cheques, no more instrastructure projects etc

 

[Peter_Tersteeg]

Why do you say this? Higher LVR's now?

LVRs are higher now, but it's not higher LVRs (Loan to Value Ratios), it's higher DSRs (Debt to Serviceability Ratios.

At 8 or 9% nowdays people are committing the same amount of financial resources to repaying the debts as people were when rates were 17%.

 

[Tony3008]

But if the rest of the world is at high rates how can we avoid it? We're all tied to the same tree.

In a perfect market the exchange rate would move over time to compensate for the difference in rates. See http://en.wikipedia.org/wiki/Interest_rate_parity#Uncovered_interest_rate_parity - not for the mathematically challenged!

 

[willair]

Can that ever happen in a climate where house prices are 6-7 times median income?
Being a global economy, and being the only nation left with house prices so high (am I right there?) is there a possibil I ponder this sort of stuff all the time heh, and yes I may fix some for 10 years..

The media will tell you different, but i would say yes by the end of the year is my guess,add an early federal election into the mix,most will vote for Kev from Queensland and the people that vote in this country and don't look at the bigger world picture will think everything will be fine everything will stay the same..
And as Australian home owners are among the most exposed to interest rate moves in the world, with 80 per cent of home mortgages set at the standard variable rate,when i first started investing the only BANK that ever helped me was the NAB,THE RATES I STARTED ON WERE 18% and that was if the Bank MANAGER LIKED YOU UNLIKE TODAY?? so many times i went in to borrow money and all they would say was come back in six months no "MB'S" AROUND BACK THEN,back then it seemed like an impossible task ahead of me never ever though that 30 years later it all came together,that's the one item about property investing it has never let me down,unlike the "ASX",Labor would want a early eletion before the rate rises kick in in big way in 2010,IMHO WILLAIR..

 

[tubs]

Yes. 10% today would cause the same pain as 17% did in the 90s.... and of course the RBA knows it.

Spot on Keith.

People have FAR more debt these days than back in the 15% days. More credit card debt, store payment plans, massive house loans, car loans etc.

People are far more sensitive to moves in rates than we were back then in pure $$$ terms, so smaller adjustments have a bigger effect.

A 0.5% increase now has the same effect as a 1% increase did back then.

I believe the RBA has discussed this previously.