The interbank lending rate has just gone up again (in the line of 7.3% or something), and there's no sign of the rate rise abating. Lo-doc and no-doc will be doing it much tougher than full-doc.. Any suggestion how this will affect the market in general? Is everyone comfortable with their current leverage level and how prepared is everyone in biting the bullet, especially if a recession is coming? I am very interested in hearing everyone's plan B, as this would help all of us through the tough times..
Interest Rate on the rise - Impact on the market
- Thread starter feihong
- Start date
I have held the belief, for years, that we are in a long term infaltionary period with increasing interest rates. The rate rise due to increased borrowing by banks at wholesale market is only a small part... With Bernanke keen to throw money to ensure deflation doesnt set in and "rescue" the US economy, this scenario is just going to speed up. Add to that inflation pressures building up around the world, and economies now reluctant to increase (due to US decreasing), inflation is def going to build up momentum ...
If this continues for a period, a year or so down the track dont expect inflation to be controlled with "0.25%" increases... expect some hefty increases next year ..
My views only...
I can't agree with you more on the inflation issue.. Time bomb is already set, going to explode anytime soon. Thus, that's why I'm interested in gathering everyone's defensive strategy to ride out th storm, especially when the unemployment rate suddenly jumps and cashflow suddenly chokes, how does everyone deal with that? (Esp. considering that the yield of some inner properties renting out for 500+ p.w. to young ppl earning 100k+ that could be at the biggest risk)
it doesn't hurt to talk about the possible downside risk.. after all, if we limit the downside risk, then we have more to gain isn't it? Imho, it is being able to hold on to our assets with sufficient cashflow during the bad time that separates a good investor from also-rans.
In my opinion the higher your debt relative to your non-financial earnings, the greater the proportion of debt should be fixed on long term contracts.
I currently have 50% of loans fixed for 10 years (all done this year at an average interest rate through cba of about 7.2%).
In regards to rentals of $500 per week being affected i think it depends on the property's location. $500 per week is not that much compared to professional peoples incomes (around $80k - $130K is the norm). Assuming $500 is for two bedrooms and two people share the place then thats only $250 each or around 11% of pretax earnings.
Hi Ausprop,
Im not sure if recession will eventuate or not.. In my opinion Interest rates have not peaked. And by the way things are going it looks like they will continue to rise.
I agree times have not been better. So much so that excesses exist in various forms around the world. One excess was US housing, now rather than let markets correct themseleves and the excesses to dissolve, the fed has thrown more fuel to the fire... Look at the prices of basic things compared to USD.. it looks like a mountain .. inflation is gaining momentum .. even the sharemarkets are looking quite excessive ... the run since the correction has been astonishing and is running on speculation. China and Honk Kong have forgotten about casinos and discovered sharemarkets ... PE of 50... gambling at a whole new level...
I also believe we have higher interest rates coming. Just locked all my rates in for the next 5yrs - that way I know what I'm up for and can start working towards the next IP. At variable rates, each .5% increase would have been the equivilant of another IP in the portfolio had I not fixed my rates.
PS Feihong - I'm on low docs, so it's not necessarily a huge disadvantage. CBA gives me the same rates as a full doc person, and I can fix for as long as I want. So depends on which FI you're dealing with.
PS Feihong - I'm on low docs, so it's not necessarily a huge disadvantage. CBA gives me the same rates as a full doc person, and I can fix for as long as I want. So depends on which FI you're dealing with.
I think property is very well positioned for the next few years. Strong economy on the whole, employment strong, high immigration and consumer confidence is still at record highs. No visble sign of large releases of land supply by any level of government to address shortages. Then looking at rental returns and yield, the constant increasing of rentals currently being experienced in almost all markets will drive prices further upwards. The biggest criticism in the past has been of the extremely low yields given the prices being paid, running ahead of what might be a 'normal' price. I see many examples of increasing rents now putting that equation far more in balance than it has been ever in the past 6-7 years...
All the anectodal evidence I see and hear about rentals is that we have only really begun their move upwards.
Interestingly, the rentals of one of my properties had at the previous tenancy changeover go from $360 to $400 pw. Eight months after signing that tenancy agreement, equivalent properties are renting for $440. Who knows what they will be in four months (well in two months when I have to give notice of the increase
). Interestingly given all other cost increases (eg interest rates), I will have to raise rent to $440 to achieve a similar 'loss' in FY06.
Its only just recently that I have seen prices start really ramp up to match these increased yields. So with the strong economy, I think paradoxically, that increasing interest rates will actually contribute to increasing house prices. Wait for the affordability crisis when we finish the increasing interest rate cycle and have them start to reduce again.....!
Its not all good news though, I rent as well...
All the anectodal evidence I see and hear about rentals is that we have only really begun their move upwards.
Interestingly, the rentals of one of my properties had at the previous tenancy changeover go from $360 to $400 pw. Eight months after signing that tenancy agreement, equivalent properties are renting for $440. Who knows what they will be in four months (well in two months when I have to give notice of the increase
). Interestingly given all other cost increases (eg interest rates), I will have to raise rent to $440 to achieve a similar 'loss' in FY06. Its only just recently that I have seen prices start really ramp up to match these increased yields. So with the strong economy, I think paradoxically, that increasing interest rates will actually contribute to increasing house prices. Wait for the affordability crisis when we finish the increasing interest rate cycle and have them start to reduce again.....!
Its not all good news though, I rent as well...
Hehe
I hear ya Buzz! I rent as well and just had an increase which I negotiated down.
The way I figure it though, the rents will definitely keep going up on my IPs, but if my own personal rent gets tough.....I'll just move 5kms further out!
That's what I call managing my downside - I can't lose! (Except it takes me longer to get to work in the morning
I hear ya Buzz! I rent as well and just had an increase which I negotiated down.
The way I figure it though, the rents will definitely keep going up on my IPs, but if my own personal rent gets tough.....I'll just move 5kms further out!
That's what I call managing my downside - I can't lose! (Except it takes me longer to get to work in the morning
I'm still expecting a flat to falling market as a result of a recession. Higher rates in the short term regardless of what the RBA does, lower as the market falls. Rents keep going up because of lack of supply.
The Christmas retail figures will be very interesting.
Still planning to buy my PPOR in the next 3-9 months, though.
Alex
The Christmas retail figures will be very interesting.
Still planning to buy my PPOR in the next 3-9 months, though.
Alex
Thanks a lot everyone, the responses have been encouraging, and I agree with most of you here. I'm definitely not a property nay-sayer, in fact, if anything, I'll be classified under the ultra-aggressive "investor" (or speculator?). Bought 2 properties in the space of 4 mths (since April this yr) and will almost certainly sign the contract next week for another, and will keep looking for further acquisitions. I have also fixed 50% of all my loans for 10 yrs to counter the anticipated rising interest. As a few of you have pointed out, the reason why I raised this topic is because the interest rate rise seemed to have picked up in pace, and this is not unlike what happened in the late 80's. So from what I gathered from everyone's saying so far, we can safely assume that yield will accelerate in the near future? Because I'm just thinking, is a high weekly rental still sustainable if recession arrives? e.g. who's willing to pay $600 per week for a 2-bedroom apartment in say South Yarra when lifestyle becomes secondary to survival? Would invest in mid to outer suburb be a better defensive strategy, given that the rental demand in these areas will actually rise during the bad time?
nah - much more sensible and legitimate question which is worthy of discussion. no sign of ranting or finger pointing.
personally, we're reducing our lvr over the next 6 months quite considerably by selling some of the low-performers - yet also look to buy another development block and develop the one we currently own. once the low-performers are sold, and our lvr has reduced, we'll look at converting some of our lo/no-docs on our definate keepers to normal loans and lock them in.
so our lvr will be down, but we will be finally be position where i feel like we are finally "starting" our proper ip investing journey. everything leading up to now was just learning - now i have to bide my time while we sell some of the "learning" experiences.
I'm noticing some changes in the market in the inland regional city I follow most closely. The very top end of the market seems to be advertising the same property at around 8 % less than the same property was advertised at a few months ago. What they're doing is they've dropped $20,000 and are offering to pay stamp duty as well.
On the lower end one of the major land developers who had been advertising land from $84K is now advertising the development as land from $75K.
On the lower end one of the major land developers who had been advertising land from $84K is now advertising the development as land from $75K.
Either way, mortgage, credit cards, etc rates are likely to increase. The main thing most people don't realise, or don't care (though they will soon) is that mortgage rates have been UNNATURALLY low (in the form of discounts to the official rate) compared to past rates, especially for lo-doc stuff. We've had low rates AND low risk premiums.
Alex
Alex
I read an article the other day (just tried to find it but can't put my finger on it right now) that said that risk premiums on US Alt-A (read low doc loans) were currently 100-200bp lower than the long term average. The article suggested that these risk premiums were heading back to (or above) the long term average.
I agree with you Alex that we face an unwinding in the risk premium here as well. Most banks are still offering low docs at a 0bp margin over full docs. Given that the funds for most low docs are sourced by securitised lending in overseas markets IMO this appears to be inevitable over the short to medium term.
regarding this topic, there are a lot of headline news on bloomberg.com about how (ridiculously) narrow the credit spread has been (i.e. no difference between the premium in AAA and junk bond) before the last market correction, and yet nobody seemed to know or care what it implies. We always become more educated after things happened, but I guess it's better be late than never
I agree with lizzie's strategy, so personally if I can't find one more property before the second half of next year then I will focusing on repaying my loan aggressively to reduce my LVR level.
I agree with lizzie's strategy, so personally if I can't find one more property before the second half of next year then I will focusing on repaying my loan aggressively to reduce my LVR level.
