Double interest rate rise warning

[Punchy]

http://www.couriermail.news.com.au/common/story_page/0,5936,12221875%5E952,00.html

Double interest rate rise warningFleur Anderson
12feb05

AUSTRALIAN households should brace for two interest rate rises, starting as early as next month, and a tough Federal Budget.

Prime Minister John Howard yesterday warned of looming danger to Australia's prosperity and a frugal Budget in May.

As Australia's debt-laden households prepare for a Reserve Bank interest rate sting following strong job and housing figures, the Federal Government is looking for big savings to pay for the country's $1.5 billion tsunami aid package and its involvement in the Iraq war.

"This will have to be a fairly tight Budget, this coming one," Mr Howard said yesterday. "We have great prosperity in this country but we cannot for a moment take it for granted."

His comments came as the Australian Bureau of Statistics revealed the average Australian mortgage in December expanded by almost 2 per cent to $212,200.

The number of home loans for owner occupation rose 1.2 per cent nationwide (1 per cent in Queensland) and the total value of new home loans rose 2.8 per cent to $16.8 billion in December.

The news on home loans, added to Thursday's jobs data showing unemployment remained at a 28-year low of 5.1 per cent, has economists tipping the Reserve Bank is a hair-trigger away from another rate rise. The official interest rate has remained at 5.25 per cent for 14 months.

HSBC chief economist John Edwards said the Reserve Bank would more than likely lift the rate next month, and then again in April.

"I think their whole mood has changed decisively after the employment and housing numbers," Mr Edwards said.

"The circumstances are sufficient for an interest rate rise."

He said the Reserve Bank's usual modus operandi was two sharp rate moves in two consecutive months because it was more effective in cooling down the economy.

Macquarie Bank chief economist Richard Gibbs forecast two rate rises, next month and in May, while ANZ chief economist Saul Eslake tipped rises next month and in April.

Mr Howard let slip his concern about the looming inflation threat to interest rates when he refused to say whether tax cuts would be part of the May Budget.

"Look, I'm not ruling anything out," he said.

"I'm just saying that it needs to be a Budget that doesn't add to any inflationary pressures."

Treasurer Peter Costello yesterday backed Mr Howard's warning and said it was important to have a tight Budget.

Mr Howard said company bosses should think twice about paying themselves bumper salaries in case they sparked massive wage claims that hurt the economy.

He said unions could not be blamed for seeking wage rises for their members when chief executives set the tone.

 

[LearningMan]

Do we all seriously think we are going to see much change with 2 x 0.25% interest rate hikes ?

Are we seriously going to see families giving away homes and sending their keys back to their banks ?

You have to love the media ... any bit of bad news and they will jump all over it !!!

 

[Rolf Latham]

Hi LM

No there wont be too many people sending back their keys :O)

BUT look at the real $ effect of the cost of money to say a tightly geared investor or business. For those with high debt to equity ratios, a 9.5 % in the cost of money could really hurt.

Its this, and the media scare campaign that will slow economic growth (more importantly credit growth) to a more sustainable level ( double digit credit growth and 4 % GDP growth tend not to work long term:O))


ta

rolf

 

[MJK]

So Rolf,

Do you think the investor will hurt more than the non investor ?

That is the investor with substantial negative cashflow tipping heaps of their PAYE into topping up shortfalls I suspect?

MJK

 

[Rolf Schaefer]

It may be a good time to think about fixing some of your loans.

Fixed rates are still very low (3yrs at around 6.5%, 5yrs around 6.9%).

It is an excellent risk mitigation strategy coupled with (hopefully) increasing rental yields should let you sleep better.

 

[DAAJ]

Hi,
How long would you predict interest rates rise will increase and then decrease?
Dom

 

[Rolf Latham]

Hi DaaJ

If I knew that Id be out there placing lots of other people's money :O)

I prefer to stick to basics, and leave the speculation for others, as Rolf S said its a good time to look at managing your rate risk, especially if you have lots of $ exposure compared to fixed income.

ta

rolf

PS a particular type of investor, for eg neg gear vs pos gear may be affected equally by a rate rise, the underlying additional cash flow they have is really quite an important factor.

 

[quoll]

It may be a good time to think about fixing some of your loans.

Fixed rates are still very low (3yrs at around 6.5%, 5yrs around 6.9%).

It is an excellent risk mitigation strategy coupled with (hopefully) increasing rental yields should let you sleep better.

G'day Rolf

Fixing interest rates?
But hasn't it been shown that in the long run you end up paying less interest if you stick with the variable rate, due to that .25% or .5 diifference between the variable and the fixed rates?

If like many new investors you got in with poor returns and have to pay out of your pocket it might be a sleep better strategy but from a pure financial point of view I can't see it as the best option.

Cheers
quoll

 

[quoll]

Do you think the investor will hurt more than the non investor ?

MJK

I know I'm not Rolf but I'll bite.

I think the non investors will hurt more. But how much hurt?

The non investors have borrowed heavily, some have pulled equity cash out of the house and spent on luxury items, with the low interest rates you have people borrowing with out thinking can I repay this at 10%, it might only hurt to the point where beer and wine sales decline, or bake been sales increase.

If the small move scares enough people the market might become interesting.

Cheers
quoll

 

[Rolf Latham]

Hi Quoll

Im not Rolf S but will reply for him , I believe he thinks like I do, itd about managing risk.

yes, long term variable will usually beat short term fixed, but if you can survive the short term spike and need to sell stock in a down market you could be going backwards big time.

ALL investors with exposure could look at doing a rate risk analysis - at what point do I have to bail ? 7.5 %, 10 % etc

ta

rolf

 

[Peter 14.7]

G'day Rolf

Fixing interest rates?
But hasn't it been shown that in the long run you end up paying less interest if you stick with the variable rate, due to that .25% or .5 diifference between the variable and the fixed rates?

If like many new investors you got in with poor returns and have to pay out of your pocket it might be a sleep better strategy but from a pure financial point of view I can't see it as the best option.

Cheers
quoll

Hi Quoll

To me that research is skewered as it assumes no for-thought has been considered in the decision.

Personally I have almost always fixed my loans and my history is.

Fixed ongoing no break costs at 13.5%, rates went from 13.5 to 17% and back down over 2.5 years. Overall I won and I had security over the crucial high period of our first home loan.

I refinanced variable at 10% rates stayed same.

I refixed at 10.5% when rates blipped. They held 1 year and dropped to 9% so I lost.

I refixed max 9% but could follow drops which it did. SO I hade no risk but all gain. Rates went to 7%.

I bought first IP and variable around 6.5%. Rates rose so I fixed three years at 6.99% 2 IPS and PPOR. Rates went briefly to 7.25 and dropped to the recent lows. I lost but my property boomed, who cares

Sold 1 IP, paid out PPOR and fixed 5 years at 6.14% in July 2003. Very happy and peaceful.

Personally I follow rates to try and pick when the masses are panicking not to save 0.5%. SO when rates do go up 0.5% that is when to act brave is you have the equity and willing to hold for two years or so to see any cap gain IMO.

Noting however local factors come into play y like Surry Hills where I am is rapidly going up market. SO a bargain here is not as large but in the long run a good buy regardless as the drivers of supply if fixed and demand ever growing, so prices rising.

In summary you gain two things when you fix:

1. Guaranteed Costs.
2. Peace of Mind.

Who much you value these is a personal thing. Running a small bus and having been through a recession where I lost my job twice, I value both very high.

Peter 147