Interest rate horizon?!

From: Michael Croft


Hi,

The US fed and analysts are talking another 0.5% cut to their rate before Xmas. Local analysts are talking two more cuts here by Feb 2002, 0.25 or 0.5% early Dec and 0.25% in Jan or Feb. So Robert F the bust you so eagerly anticipate may yet be averted!

IF these rate cuts occur I will not have seen anything like this type of generic buying/financing opportunity ever! It will be lending/borrowing Nirvana.

Michael Croft
"The best parachute folders are those who jump themselves."
 
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Reply: 1
From: Sergey Golovin


Hi Michael,

Some one said on the TV yesterday –
They can end up on very same way as Japanese economy... Interest rate cut outlived it self... It has passed that "valuable and powerful tool" level.

As you recall interest rate in Japan reached 0% level – Government used to give money away for free no interest rate on funds borrowed. Obviously you do have eventually return all the money you borrowed.

Funny enough, talking about Japanese economy, it is good opportunity for them to restructure and rebuild a lot of it (economy) and they do exactly that right now – massive restructuring, quietly in the background.

But then again who knows.
As you know I am not an economist.

Serge.
 
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Reply: 2
From: Robert Forward


Hi Michael

Yes I read that report too.

I was somewhat stunned that they would drop rates that low. But I still am in the mind that the US is already in a recession of which will get a tad deeper before it recovers.

The US Fed dropped rates by 0.5% the other day and we didn't follow yet, though this is only due to pending election this weekend. If the Fed are going to do another drop between now and the next RBA meeting I will stick my hand up with a guess of a 0.5% drop in rates by the RBA. Otherwise in my opinion only, we'll have a 0.25% next month followed by a 0.25% drop in Feb next year and that will be very close to the bottom as far as our rates go.

But then we had a 0.4% increase in the unemployed figures that were released yesterday, and this month we also have thousands of school leaves also wanting to join the work force which just may lead to higher unemployment figures.

We are still on a slippery road that is going to be lots of fun to watch what happens. Me, myself, I'm prepared if the economy goes either way at the moment, mainly cause I've structure myself that way.

It's all a matter of risk management.

Cheers
Robert

The Sydney "Freestylers" Group Leader.
 
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Reply: 2.1
From: See Change


Hi Michael

My question is " Why do they need to drop rates so far and so Quickly ?"

The answer is that they know things are going to get a lot worse. Will they be able to stop it ( economic down turn )?

My thoughts are it will be worse than they ( the experts)are anticipating at the moment.
Economic activity is generated either by consumer or business spending. Business spending stopped a while ago and consumer spending has been driving the economy for a while.

Consumer spending is driven by confidence and that is what sept 11th hit.

People who are concerned about losing their jobs or concerned about the impact that an economic slump may have on their life styles
are not going to bring forward or commit to purchases because rates have fallen a further 0.5%. They're just not going to buy.

The main effect on drops in rates will be in the financial markets and any one who follows these knows that the price activity doesn't necessarily reflect the value or stability of the under lying assets.

Trying to change the economy via fiscal stimulus has always been an imprecise science.

Do people have faith that the current crop of economic managers will be any more effective than previous ??


safe investing see change

it's better to be guide by your dreams than your fears
 
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Reply: 3
From: Rolf Latham


Hi Michael

Nirvana perhaps not ?

A number on lenders are putting screws down in how they assess serviceability. One has recently increased their service margin from 1.5 to 2.25 above the standard variable.

Ta

Rolf
 
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Reply: 2.1.1
From: Michael Croft


Hi See Change,

Far be it from me to moralize about benefiting from others misfortune, but are we in Australia really going to curtail spending that much? We didn't do it during the Vietnam war, the oil crisis, the Iran Iraq conflict, the Cuban missile crisis, the Cold War and the threat of annihilation, hyper-inflation, deflation, the floating of our dollar, the end of the gold standard, the recession we had to have and so on.

My point is that "this too will pass" and those that are astute will do very nicely thank you.

The fact that the same economist/experts are predicting rates rises in mid 2002 tells us they know two fifths of stuff all, and are just covering all bases.

Michael Croft
"The best parachute folders are those who jump themselves."
 
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Reply: 3.1
From: Anonymous


Hi all,

So what does this mean for inner city property prices in Melbourne & Sydney? Up, down or flatten?

Anon.
 
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Reply: 3.1.1
From: Rolf Latham


Hi

Dont think rates have a lot to do with this if they dont swing wildly.

Dont know about Melbourne, but I am seeing some very "creative" vendor based financing deals being put together in Sydney to move inner and near city unit stock.


Ta

Rolf
 
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Reply: 3.1.2
From: Michael Croft


For your information let me ask you a question.

Imagine you are a home buyer trying to buy the "dream". Interest rates drop 0.5% and you can now borrow another $20k as a result. Would you a) keep to your original budget/price, b) adjust the budget/price to reflect the increased affordability, or c) reduce the price/budget?

My guess is that some will do a), others b), and almost none will do c). How many will extend their $$ spend to reflect their increased borrowing capacity? Your guess is as good as mine, but a certain percentage will pay a bit more for properties than they would have without the rate cut(s). 'Tis but human nature after all.

Michael Croft
"The best parachute folders are those who jump themselves."
 
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Reply: 3.1.2.1
From: See Change


Michael

I'd do what we've already done , which is to sell our very nice house with the big mortgage and buy a nice house without a mortgage.

People with any sense will do (a) , which means most will do (b). Most of these will have no problems but some will have problems because when rates go up ( at some time they will, ) 0.5 % at a lower rate this has a bigger effect in absolute terms than at 0,5% rise at a higher rates.

As I said before , some will put off the purchase if they're concerned about their job security and for these the drop will mean nothing .

happy investing see change

it's better to be guide by your dreams than your fears
 
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Reply: 4
From: Colin Mills


Yeah but who wants to borrow money to buy assets that are dropping in value? I would prefer to pay 8% interest in a rising property market rather than 5.5% in a falling market any day of the week. Your analysis seems a bit superficial to put it mildly.
I would have thought that during a recession people would be concentrating on holding onto their job and making sure the bills are paid rather than focusing on borrowing an extra 20 grand because rates have been shaved by 50 points. Does not sound like a borrowing nirvana to me.
BTW I thought you were suppose to be a big shot around here? A few more posts like the above and you could end up losing your fan club!
 
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Reply: 3.1.2.1.1
From: Steve Navra


It is all in the TIMING!

With interest rates this low, affordability is at its peak. Notice that the banks are indeed raising there service margins to compensate for what they obviously believe is too low a rate. (So even if the rates fall further, the serviceability will remain the same)

The 'smartest' of all is See Change. (sold nice home with big mortgage for home sans mortgage) The idea being to take advantage of the best prices that one can achieve, it definitely being a sellers market at this time. Maybe it will be wise to wait for interest rates to increase again before buying, so as to pick up 'bargain purchases'. It all looks very similar to the late eighties and early nineties, when these who had overspent during low interest rates were forced to sell as rates went up. AND hey, if you bought then (between 1990 and 1994) your properties would have doubled and more by now. (In Sydney and Melbourne that is!)

Hmmmmmm, I wonder what Nostradamus would be doing?


Regards,
Steve
 
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interest rates

Reply: 3.1.2.1.1.1
From: Brett Burt


This is a multi-part message in MIME format.

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An interesting view has been recently put forward, that interest rates =may stay low for the next 10 to 20 years due to the baby boomers =requiring less money i.e there was a big money squeeze in the 70's-early =90's, now, as the boomers are into 3rd or more home they need less and =less money, lower LVR's. The following generations, X & Y, are much =smaller than the baby boom (birth numbers in western world are generally =very low compared to late 40s,50s, early 60s) so the demand might not be =there in the future.

The boomers also pushed up prices of their parent's properties. This =will not happen for the boomers as Gen x is smaller. Also trillions =will be, are being, built up in super and mutual funds and this money =will compete with itself to get returns therefore making 'the hire' of =money cheaper. So maybe high/low interest rates may not follow the =cycles they have been in since 1940's. And it may be the case that the =capital growth we have seen since the 50's might not happen over the =next 50 years, or at least nowhere near the past growth.

So bite off more than you can chew and then chew like crazy ! Cause I =don't think the 50 year property bubble will grow much more.

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<!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.0 Transitional//EN">






An interesting view has been recently put forward, =that
interest rates may stay low for the next 10 to 20 years due to the baby =boomers
requiring less money i.e there was a bigmoney squeeze in the =70's-early
90's, now, as the boomers are into 3rd or more home they need less and =less
money, lower LVR's. The following generations, X &amp; Y, are much =smaller than
the baby boom (birth numbers in western world are generally very low =compared to
late 40s,50s, early 60s) so the demand might not be there in the future. =


The boomers also pushed up prices of their parent's
properties. Thiswill not happen for the boomers as Gen x is =smaller.
Also trillions will be, are being, built up in super and mutual =funds and
this money will compete with itself to get returns therefore making 'the =hire'
of money cheaper. So maybe high/low interest rates may not follow the =cycles
they have been in since 1940's. And it may be the case that the capital =growth
we have seen since the 50's might not happen over the next 50 years, or =at least
nowhere near the past growth.

So bite off more than you can chew and then chew =like crazy
! Cause I don't think the 50 year property bubble will grow much =more.


------=_NextPart_000_0021_01C16944.C289FC00--
 
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Reply: 4.1
From: Jeremy Laws


There is a very strong argument, even expectation that the Fed will lower rates to 1% by the meeting after christmas. Clearly everyone should buy US IP's. Even the economists themselves are saying the _except_ for the housing market there is no fear of overheating any sector of the economy. They are hoping people will be using equity to buy toys - stimulate in otherwords. Lets go shopping.......
 
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Reply: 4.1.1
From: Robert Forward


Hi Jeremy

As most know, you have property in the US. Can you tell us how you went about in getting your finance (if you don't mind) to buy your IP's.

A jump in property prices in the US is probably high on the agenda. From whispers (rumours that is) there has been a HUGE drop in demand for properties in Manhattan, with corresponding drops in prices. This area could be a very interesting place to buy into for some trading properties with big gains in the future, once consumer confidence is back that is.

Whats your thoughts?

Cheers
Robert

The Sydney "Freestylers" Group Leader.
 
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Reply: 4.1.1.1
From: Jeremy Laws


If anyone has a serious wish to do so contact me. I would suggest 100k AUD would be a good start. 30% downpayment is required if you get away with less its a bonus. (I was 'wrapped' so got in for 10% down) This amount should get you a 'good' building in the area I have bought in (LA) and should comfortably net you around $1000USD per month. A friend of mine is playing with $400k AUD, which should get him (100% borrowed) a permanent net rental income of 50k AUD pa.I put in a LOT of work to get this happening for me, and I have found the people who can, will and have done these deals before. I will NOT stuff them around - it will make everyone less anxious to deals with foreignors. The market BTW, in great contrast to ours, is just about where it was at the end of 88-89. I dont see how it can't go very very well. The US market is huge (LA's population basically same as Oz) and is the same and different. I have found it very productive, and a pleasant surprise to actually have to pay tax on brand new purchases as they do cashflow!
 
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Reply: 4.1.1.2
From: Tom Cleary


Basically, American interest rates are now zero %,as they are below the inflation rate, and look like falling further. In my opinion, what going to happen will be similar to what happened in Japan.The Fed will will have to keep pumping money into the economy via interest rate drops, otherwise the banks will go bust.
The dreaded R word is on everyone's lips. I think the Reserve will have to revise their figures for GDP, conveniently after the election, as they have done in the USA.
If that happens and we follow the policy prescriptions of Japan, we should not be surprised if the effect is the same as there.
If that happens then it wont be recession we have to worry about, but deflation, which as the name suggests is a drop in the value of real assets.
So property should move sideways for a while and slowly start to drop.
How long this will last is problematic, seeing as politicians are driving the economy, and not the real world.
 
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Reply: 4.1.1.1.1
From: Astro Boy


Hi Jeremy - sounds like a dream come true...!

what (if any) downsides to investing in US have you come across?

also - what cap growth have you seen? is this representative of that region of LA, or did you get 'good buys'?

Cheers
ab
 
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Reply: 4.2
From: Michael Croft


My mate Colin back again, I knew I could count on you. Yes it was a flippant question/answer to a superficial anon post.

Michael Croft
"The best parachute folders are those who jump themselves."
 
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Reply: 4.1.1.1.1.1
From: Jeremy Laws


AB,
It is good. CG same as just about everywhere else in the world, but seems about 2-3 years behind SYD MEL price rises. I had the added bonus of the AUD falling substantially. I have done 'good.' I don't think I have started to get big CG there yet - as I said the market has only just got to where it was in 88-89. Lots to go. Esp with I/R going so low. It isn't your average investment, but increases your gearing potential hugely. I love it! UK next - hopefully soon...
 
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