Don't leverage into property

[want2bewealthy]

The RBA have control over house prices in the form of interest rates.
And I doubt the banks would be anywhere near as keen to lend against resi if they didn't have some sort of lever/control over lending for property.

I can see that these low rates will land some borrowers in big trouble if rates hike too quickly, as a major percentage took out variable loans over the past year, and are continuing to do so as fixed rates are pretty well ridiculous as opposed to whats available on variable right now. A sign of things to come, but I'm not 100% sure if they will really make it to 8% as some fixed rates are to borrow right now, nor will I pretend to be.

I'm really questioning what will happen with rates in the coming years as property prices soar to new levels and the RBA place the cap on prices in the form of interest rate rises.

Lifting rates too high will see prices fall, or at least stagnate due to financial hardship among many of the variable crowd, the banks don't want this to happen and know it's a real possibility. Which poses the question: Will interest rates track lower in the short to medium term, like they have in other economies? Only time will tell.

I really don't like to try and predict what may, or may not happen with interest rates in the future, but my guess right now would be lower interest rates in the short to medium term. I have no real idea what 'medium' term means, but am thinking 2-4 years until inflation has a chance to kick in.

I also think that for larger scale investors higher interest rates should be a major concern and risk mitigation should now be under-way, or already sorted. Don't wait until it's too late.

 

[Jonril]

That's the only part of your post I agree with. I think the RBA has done a great job raising rates into the top of the boom to take the edge off, then cutting quickly as things hit the fan. Now it's building up ammo by raising rates again.

I'm glad we can agree on something. on the other matters pointed out, all I can say is I have a different point of view.

 

[alexlee]

The RBA have control over house prices in the form of interest rates.
And I doubt the banks would be anywhere near as keen to lend against resi if they didn't have some sort of lever/control over lending for property.

Don't confuse the RBA and the commercial banks. The banks are keen to lend against resi because they think owner occupiers are less likely to default on their loans. They have even more control over lending for businesses and commercial.

I'm really questioning what will happen with rates in the coming years as property prices soar to new levels and the RBA place the cap on prices in the form of interest rate rises.

Nominal prices have been increasing for decades, though, so the 'soaring to new levels' thing isn't that relevant. It's a matter of how fast it rises and what that implies about economic activity.

ifting rates too high will see prices fall, or at least stagnate due to financial hardship among many of the variable crowd, the banks don't want this to happen and know it's a real possibility. Which poses the question: Will interest rates track lower in the short to medium term, like they have in other economies? Only time will tell.

The commercial banks have no control over RBA rates. Commercial banks always want lower variable rates. Other economies that have lower rates also appear to have weaker economies than we do.

Is there any reason why people mix the RBA and the commercial banks such as the Big 4?

 

[want2bewealthy]

Hi Alex. You won't find an argument with me, lets just say we tend to see things differently and I respect where you're coming from.

Don't confuse the RBA and the commercial banks. The banks are keen to lend against resi because they think owner occupiers are less likely to default on their loans. They have even more control over lending for businesses and commercial.



Nominal prices have been increasing for decades, though, so the 'soaring to new levels' thing isn't that relevant. It's a matter of how fast it rises and what that implies about economic activity.



The commercial banks have no control over RBA rates. Commercial banks always want lower variable rates. Other economies that have lower rates also appear to have weaker economies than we do.

Is there any reason why people mix the RBA and the commercial banks such as the Big 4?

 

[craigb]

read beetween the lines , mr stevens is realy saying ," DONT LEVERAGE INTO PROPERTY".
because , all of my money is in shares....

because , i have missed the boat and i have no IP's ...

because , i don't want to have a bad name when those folks that have new homes and new cars get evicted ..

because i want every one to get rich off the market , let it be said let it be written..

because we cant release the land quick enough , and if you have more than one we will have a big bubble.

because , I have chinese mates that have yet to buy one...

just some thoughts , on reading beetween the lines ,

 

[Neophyte]

Few points.

1) Glenn Stevens get paid around $500K. Plus he will get super-cushy government super when he retires since he's been at the RBA for 30+ years meaning when he started it was all defined benefits. So there are no personal motives for him.

2) The RBA doesn't care about profit because they can print money. It isn't a business, it isn't a "bank" in the normal sense. They control the currency by changing the amount in distribution. It isn't a private company, its really a government agency.

3) Official interest rates are only a guide. The government could fix the interest rate that mortgages are, however then the volume of money lent cannot be controlled.

4) Perception of future rate changes is more important than reality. As mentioned earlier what is important is influencing decision making processes, not charging lots of interest on existing loans. Suggesting that rates will rise in the future encourages people to pay down existing debt (reducing inflation), suggesting rates will drop tells people to spend now since the debt will be affordable.

 

[alexlee]

1) Glenn Stevens get paid around $500K. Plus he will get super-cushy government super when he retires since he's been at the RBA for 30+ years meaning when he started it was all defined benefits. So there are no personal motives for him.

More importantly, making more profits for the RBA doesn't affect his pay packet. In any case, he'd make far more than 500k as a consultant or economist for any of the big banks.

 

[Jonril]

I would rather not get into an argument, but I feel I should clarify some of my points.

For the simple reason that Stevens doesn't get paid according to how much the RBA makes. Putting it another way, if you tell a bank director 'we pay you the same base salary no matter how much profit the bank makes', they're not going to be focused on profit. The point of the central bank, simply, is NOT profit.


Stevens is really irrelevant in the discussion he is a guy with a job at the RBA. There is no I in RBA it is The Reserve BANK of Australia. It has an Investment mandate... here it is straight from the RBA.

THE RBA INVESTMENT MANDATE... They even call it that...

as much as it is ignored it makes profits. As per below links and quotes

RBA makes profits.

"Performance Measurement

Each day the Middle Office calculates portfolio returns on an absolute basis and relative to the benchmark. Since the introduction of the risk management framework 15 years ago, the average annual return on the RBA's benchmark (in SDRs) has been 5.1 per cent (Graph 4). Decisions taken by RBA portfolio managers have added a further 23 basis points to that return."

Look they even graph their profits so they must be aware they are making a profit... Graph of RBA profits... bit out of date but hey guess no one really cares, so the RBA haven't updated it


I doubt profit is in the RBA's mandate. He certainly doesn't get praised or rewarded for making profits. You really think the standard battler would prefer higher RBA profits and pay higher mortgage rates compared to lower mortgages rates?

I direct you to the investment mandate above. Averge Joe has to look after himself it isn't in the RBA's "mandate" to make sure averge joe makes a killing in resi investments be it IP or PPOR. There is more to the economy than the mortgage belt.

Again, what incentive does Stevens have to maximise profits? He doesn't get paid a bonus. He isn't beholden to either political party, as he showed when he raised rates on the Howard government who appointed him. That, more than anything, showed me the RBA is politically independent.

satisfaction of doing a good job?, I can't speak for the man, but the RBA is not Stevens and IR policy it has many roles

And I'm saying the RBA doesn't care what the interest rate is, as long as it achieves their mandate. There is no 'favourable' direction for interest rates. The interests of the RBA, the government and Australia may be different. The government always wants lower rates. The RBA is neutral in that it'll set rates at whatever is necessary based on its view.

I can agree with RBA not caring what IR's are... seeing one of their mandates is a return on their investments... sorry sometimes I have a cynical streak.

Ask yourself, what possible good can higher rates do for a government considering higher rates almost certainly ticks off borrowers (voters)? The RBA is, and has shown itself to be, pretty independent.

That is for the spin doctors to spin and the media to lap up. The RBA is independent in regards to it's own interests which involve the best interest of Australia, which the govt is a Representative of, which means the RBA in theory should have common interests with Govt.

The RBA doesn't need voter approval, since they're not elected.

True, but the RBA need the economy to run stable, so their figures look good... and if they are sitting on RMBS that the banks have off loaded to them then they are left holding the bag of *hit if a bubble bursts.

http://www.rba.gov.au/mkt-operations/images/rba-dom-port.gif



That's the only part of your post I agree with. I think the RBA has done a great job raising rates into the top of the boom to take the edge off, then cutting quickly as things hit the fan. Now it's building up ammo by raising rates again.

Economics is an enigma encased in alchemy held together by ether. Economists are a bunch of tea leaf readers... damn there goes that cynical streak, I just cant hold it in check.

 

[Jonril]

Few points.

1) Glenn Stevens get paid around $500K. Plus he will get super-cushy government super when he retires since he's been at the RBA for 30+ years meaning when he started it was all defined benefits. So there are no personal motives for him.

All men are not born equal... If I had been making 500k pa I would have given up the ghost of sitting on a *hitty bank board long ago... Stevens is a true patriot... we should build a statue in his honour.

2) The RBA doesn't care about profit because they can print money. It isn't a business, it isn't a "bank" in the normal sense. They control the currency by changing the amount in distribution. It isn't a private company, its really a government agency.

Printing money is considered bad form, but if you are too incompetent to stay afloat in the free market it is a good racket to have as a fall back

3) Official interest rates are only a guide. The government could fix the interest rate that mortgages are, however then the volume of money lent cannot be controlled.

Like china (in a sense), the volume lent can be controlled if the govt is the one giving it out... just like China.

4) Perception of future rate changes is more important than reality. As mentioned earlier what is important is influencing decision making processes, not charging lots of interest on existing loans. Suggesting that rates will rise in the future encourages people to pay down existing debt (reducing inflation), suggesting rates will drop tells people to spend now since the debt will be affordable.

Econ-Alchemy at work?... sorry I am having a bad day I just can't contain my cynicism.

I apologies for my point of view I am a very bad man...

 

[speculator]

Leverage into property

Forget all this nonsense from Glenn Stevens or Kochi . They are full of theory and nothing else. Borrow as much as possible and buy as much as you can. That's been my policy even when interest rates were 17% in the late 80's.

Just focus on Demand and Supply. Just economics 101. There is time to jump out if it get's too inflated. Don't own Gold. Buy A$. Borrow in other currencies and convert to A$. If Gold goes up A$ will go up. I am currently looking to borrow upto $4m. My policy has been to take any loan that anyone gives me and put it into property. I have even speculated on virtual real estate such as domain names. The only thing that will guide me is demand and supply and nothing else. Trends can be self fullfilling and prices will go higher. The market is never wrong. It is more risky to invest in cheap US areas than to buy a few million dollar property in Point Piper or a blue chip area in Melbourne by borrowing as much as you can. Just look at the big picture and speculate. Don't go against the market.

Keep $100000 on the side (from borrowings) to pay interest on the loans when you are ready to get out. Profit is an opinion and cash is a fact. I have used borrowings to live and pay school fees in the past while letting my highly geared properties appreciate in value. When I cash out I am still ahead. I only focus on blue chip areas.

 

[--(< PJ >)--]

IMO, Stevens is talking up his own books. Dropping hints to forex investors. If he talks up the AU $ on the back of high interest rates now. He can blissfully let the RBA sell the AU $. Then when the next *hit storm hits and the AU $ slides and forex traders rush to the safety of the US $ (or whatever is "safe" ) the RBA can make a tidy profit on the balance when it buys back the AU $ on the cheap with its own forex holdings. The RBA has done it before, maybe they are gunning for the same trick now.

That's an interesting angle Jonril.

The average interest rate I work on for my long-run sensitivity analysis is 8%, so recent speculation about a 10% variable mort rate doesn't make me feel all warm and fuzzy I must admit.

But, given how many lovely deals are around I'm employing a very high leverage approach. Very agressive. Right now, I'm trying for a lovely little PPOR.

When the market picks up again, I'll mostly sit there and twiddle my thumbs and wait for the bottom of the/a market again. The odd +ve cash flow deal might come along but otherwise it'll be pretty quiet in my spreadsheet, just like late 06 and during 07.

Are you guys planning to do something like that too?

PJ