Interest Rate Cycle

[TJamesX]

Thought it would be interesting to see where people think we are in the interest rate cycle and what they believe will happen over the next two years. We have had eight 25 basis point rises in a row - are we nearing the end....?

Obviously this is highly speculative stuff, but I'm willing to have a stab

I believe there will be two more rises over the next 12-18 months and rates will hold steady after that.

TJ

 

[Tim]

TJ,

based on what I have been reading (AFR and CFS investor letters) I tend to think that inflation will rise one or two 0.25 points in 2007-2008 and then stay steady, helped by the US and China markets staying reasonably level.

That is unless some major unforseen event occurs.

Tim

 

[RichardC]

That is unless some major unforseen event occurs.

Tim

Just how much of recent history did you forsee? Extrepolating current trends is deceptively easy in theory but dangerous in practice.

A couple of yrs back Thommo raised the possibility of parity with the US$. It was obvious then that the Yankee$ was in decay and that the Pacific Peso was riding the resources boom. While I didn't do the exercise, if the currencies were plotted on a chart, the trend lines would intersect. Well we are half way there now. Can you believe our Res cutting int rates to prevent this happening? I can. How much would they need to cut? No idea, but I suspect that our Gov will run the printing presses/cut int rates to ensure it doesn't happen.

But I leave such predictions to mugs and economists and I'd be more likely to back the mugs. Exit left another mug!

 

[Peter 14.7]

Hi All

Off Topic but if your question is relation to IP growth then like RichardC I also remember the polls and debates of the past re interest rates and I can provide one insight I have gleamed, in the end, interest rates don't really matter.

Now I await the slings and arrows but the reality is rates do not show direction to the property market.

Cases in point are:

• Since late 2003 rates have risen yet good old WA property has beaten then by heaps! Rates rose because of high growth which was driven in big part by WA. Who cares is rates rise1% or 2% when you are getting 20% per annum CG.
  
• Conversely in 2001 to 2003, the Docklands apartments market tanked in Victoria. This was despite rates being same or even lower and very historically low. Oversupply, lack of renters and too much speculation was the devil here.
  
• My own neck of the "woods" (Woodend get it ) is driven by tree changers like me. We sell out of Sydney, Melbourne even Perth and for $500k you can get a massive home on an acre or two. So the value of homes here is a lot higher than say Kyneton or Castlemaine because the market is set by what you get when selling out and not what the local economy is, which is influenced by interest rates.
  
• And lastly, South East Qld lower unit market seems to keep on keeping on as a good fundamental investment due to constant demand for rentals.

So whilst the interest rates are important in the end the location and local fundamentals have a greater influence on whether an IP goes up or down.

Peter 14.7

 

[asdf]

Based on recent GDP and building approval numbers coming out, I think we may be done for 07. The 3 rate hikes are starting to hurt the rest of the economy. But Like Peter 147 said, who cares. Higher inflation may equate to higher rates but at least I know everything else is going up be it rent or house prices.

 

[TJamesX]

Well I thought I would be pushing it with the two rate rises over the next two years, but it looks like most are even more pessimistic!!!!

But I can't see it happening - especially with the recent economic figures out not painting a pretty picture..... the question really is will the RBA be hamstrung by inflation if things do go bad

Maybe the RBA has done its job - people are convinced they will keep going up..... any of the 7% + pessimists want to comment on reasoning

TJ

 

[Peter 14.7]

Maybe the RBA has done its job - people are convinced they will keep going up..... any of the 7% + pessimists want to comment on reasoning

TJ

I didn't vote that way but I have found in watching rates the masses seem to overshot the mark , be it up or down.

In early 2003 when all sign were rates had bottomed and could rise most punters and economists where with the more drops to come team, havin seen so many.

Similarily the reverse happened in 2001 when the blip of rates went up acouple of points. More rises maybee 9% some said.

The thing I watch is what the RBA looks to 12 months time and not now.

Look to:

• fuel, drip, rise or stay
• drought breaking, will we get rain
• mining output , many ports of choked asis
• wages growth

as the sign to what the RBA looks for.

Regards, Peter 14.7

 

[ozi]

Steve McKnight's thoughts on rates

Hi all,

Just wondering if anyone attended Steve McKnight's book launch the other week? I didn't, but viewed his presentation on his website. Worth a look if you haven't seen it (runs for 55 mins):

http://www.propertyinvesting.com/book3/launch.html

He is tippings rates to be 9%+ this time next year. Also, he expects prices to drop around 10-20% over the next year or so. Going by what he says, the next boom is some time away.

I'd be interested to hear people's opinion on this. He raises some interesting points.

Regards,
Ozi

 

[Peter 14.7]

The thing I watch is what the RBA looks to 12 months time and not now.

Look to:

• fuel, drip, rise or stay
• drought breaking, will we get rain
• mining output , many ports of choked asis
• wages growth

as the sign to what the RBA looks for.

Regards, Peter 14.7

Further to my comment todays Aust states.

The Australian — This story is from our news.com.au network Source: AAP

Consumers shrug off money woes
December 07, 2006
CONSUMER spending in November posted its first monthly rise in four months, as consumers became used to higher petrol prices and the spectre of higher interest rates and splashed out on cafes and apparel, a survey has shown.

Consumer spending climbed a seasonally adjusted 1.0 per cent last month, after being unchanged in October, according to the Cashcard Retail Activity Index.

The index last rose in July when it climbed 0.7 per cent, according the index, which bases its findings on electronic cash transfer activities.

Australians spent a seasonally adjusted $18.6 billion in November, outpacing the index's long run average of a 0.6 per cent rise for the month.

Last month's results benefited from seven full days of spending on items such as food and clothing for the Melbourne Cup on November 7.

The trend indicates spending is on track for another record breaking December shopping season as Australians come to accept persistantly high petrol prices and the possibility the Reserve Bank of Australia may continue to raise interest rates.

 

[Ausprop]

with the amount of data coming out now indicating a sick economy, you would have to wonder if the RBA has gotten too carried away with the rate increases. At this point in time the next move looks likely to be down... if the US tanks as badly as some are guessing then it could be rapidly.

 

[RichardC]

Bill Gross, of PIMCO fame, probably the most respected authority on bonds and interest rates in the US is saying 3% is possible and we can't get far out of line with the US. The high rates here blamed on Paul Keating were really Paul Volker's doing.

 

[TJamesX]

with the amount of data coming out now indicating a sick economy, you would have to wonder if the RBA has gotten too carried away with the rate increases. At this point in time the next move looks likely to be down... if the US tanks as badly as some are guessing then it could be rapidly.

I don't think the RBA has gotten too carried away, as they have been targeting the recent run up in underlying inflation. While it makes sense to reduce rates when the economy is slowing, the only check against this is inflation.... can't just continue to inflate your way out of trouble by dropping rates.

IMO the situation we may be in is the result of not including housing price data in CPI. I would argue that it is a significant leading indicator of future inflation, now that everyone has easier access to drawing on home equity. By not including it you essentially keep rates lower as the prices run rampant - wait for eveyone to draw on the equity and new home owners to load up on debt.... then increase rates as the increased wealth filters into the economy, just at the time when everyone is maxed out on debt.....

 

[XBenX]

Bill Gross, of PIMCO fame, probably the most respected authority on bonds and interest rates in the US is saying 3% is possible and we can't get far out of line with the US. The high rates here blamed on Paul Keating were really Paul Volker's doing.

Thommo,

We have been out of line with the US for some time.

Take a look at the past 5years.

Regards,

Ben

 

[NormH]

Well I am no expert, the financiers are, the banks generally very much so. I see 3 year fixed at about 7.2 and the banks want to make a profit on that money so if they are letting it out at 7.2 for 3 years then they will need bo be getting it at about the 6.2 - 6.5 mark for those 3 years. This suggests to me that although there may/maynot be further rises there will be falls cos the banks have to also build in their safety margin or cost to be able to offer those rates.

So just an opinion and certainly not an expert - just an observation

Norman

 

[TJamesX]

Well I am no expert, the financiers are, the banks generally very much so. I see 3 year fixed at about 7.2 and the banks want to make a profit on that money so if they are letting it out at 7.2 for 3 years then they will need bo be getting it at about the 6.2 - 6.5 mark for those 3 years. This suggests to me that although there may/maynot be further rises there will be falls cos the banks have to also build in their safety margin or cost to be able to offer those rates.

So just an opinion and certainly not an expert - just an observation

Norman

Norman I believe that banks setting of fixed rates are not a prediction by them of where rates are going because all/most fixed rate loans would be sourced from fixed rate borrowings of the same term. ie the banks carry virtually no interest rate risk on fixed loans they write..... they are mainly concerened with credit risk

TJ

 

[TJamesX]

Hi All

Off Topic but if your question is relation to IP growth then like RichardC I also remember the polls and debates of the past re interest rates and I can provide one insight I have gleamed, in the end, interest rates don't really matter.

Now I await the slings and arrows but the reality is rates do not show direction to the property market.

Finally got around to answering.....

No I don't think rates directly determine house prices - but they have a large bearing on affordability. However if the market believes that prices will continue to rise at a reasonable rate (8%+), then affordable or not people buying wont care - as they will be better off just getting in the market.

It would be interesting to see the Australia residential property total LVR from 1998 onwards - I suspect that it has been increased significantly. And even with prices pausing in the eastern states from 2003, the total LVR increases as more new home buyers enter the market at 80%, 90% and 100% lends..... that will not change as people on wages of 40-50k find it hard to scrape together any sort of meaningful deposit.

So if the LVR as a whole continues to increase then IMO the market as a whole would be more exposed and sensitive to movements in interest rates.

Bill Gross, of PIMCO fame, probably the most respected authority on bonds and interest rates in the US is saying 3% is possible and we can't get far out of line with the US. The high rates here blamed on Paul Keating were really Paul Volker's doing.

I think one of the more important issues facing Aus and the US is not whether they will fall into recession, but IF they do.... will the central banks be hamstrung on interest rates.

A lot are predicting the US to start reducing rates next year.... but I have read some interesting articles that are far more sceptical

http://articles.moneycentral.msn.com/Investing/JubaksJournal/FedHasLostControlOverInterestRates.aspx

TJ