Is 25 basis points enough to cool the market?

From: Nigel W


The RBA raised the cash rate today by .25% to 4.5%.

Is this akin to trying to put out a raging inferno with a garden hose?

Is the market just too hot & crazy for this small rate rise to make any difference?

Will the rate drop in fact have the opposite effect to that intended, resulting in an increased sense of urgency amongst the herd of homebuyers and misguided investors slugging it out at auctions?

How big a rise is needed before people start really hurting? (I'm too young to remember the heady days of 18% interest rates)

Dust off your crystal balls and try to predict where the market's going.

My 2.2 cents worth is that we would need about an additional 2.5% rise for those geared to the max with a low yield property to really consider selling...other views?

Les, whip out that calculator!

N.
 
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Sim

Administrator
Reply: 1
From: Sim' Hampel


On 5/8/02 10:55:00 AM, Nigel W wrote:
>The RBA raised the cash rate
>today by .25% to 4.5%.
>
>Is this akin to trying to put
>out a raging inferno with a
>garden hose?

What inferno ? The rate rise was designed to increase the cost of finance in order to keep the economy from overheating... not specifically the property market. More of a "slight touch on the brakes" to keep things under control in my opinion.

>Is the market just too hot &
>crazy for this small rate rise
>to make any difference?

In general I don't think it will have a huge difference right now... people will look at the rate rise and do the sums and work out that it's not really that bad... and rates are still way lower than they have been in a long time.

>Will the rate drop in fact
>have the opposite effect to
>that intended, resulting in an
>increased sense of urgency
>amongst the herd of homebuyers
>and misguided investors
>slugging it out at auctions?

I've heard reports that this started a couple of months back, when the RBA announced that it was looking to start increasing rates. By some perverse sense of logic, apparently people have been running out to buy property to "beat the price rise"... crazy but true ! Especially when fixed rates have been up for quite some time now.

>How big a rise is needed
>before people start really
>hurting? (I'm too young to
>remember the heady days of 18%
>interest rates)

My opinion is that if you wanted to shock the market right now, put them up 2% all at once and the bottom will fall out for a couple of months as all the mums and dads run for cover. The more knowledgable investors will look at the bigger picture and make decisions on deals taking into account the interest rate.

>Dust off your crystal balls
>and try to predict where the
>market's going.

Sorry, mine's broken. I have seen a slight slowing of the frenzy in the areas I look (pre-rate cut of course)... but people (owner occupiers mostly) are still paying ridiculous prices for things.

 
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Reply: 2
From: Jas


This is what the RBA said to explain themselves

-----------------------
Australia's inflation rate, at 2.9 per cent, remains close to the top of
the target range. Inflation seems to be flattening out, following a
period in which it had been on a rising trend owing in part to the
substantial depreciation of the Australian dollar over the 1997-2000
period. There are signs that these exchange-rate effects are beginning
to fade, and hence the prospects are for a moderate decline in inflation
in the next few quarters. Over a longer horizon, however, it is likely
that inflationary pressures will continue, as surplus capacity in the
economy is gradually used up. This is a contrast to what was expected
when the Bank reduced interest rates last year.

In reviewing all these factors the Board's assessment was that the
outlook no longer warranted a level of cash rates at the bottom of the
range of recent experience. To persist with a strongly expansionary
policy setting would risk amplifying inflation pressures and, over time,
could fuel other imbalances such as the current overheating in the
housing market, potentially jeopardising the economy's continued
expansion. The Board judged that an increase in the cash rate would
reduce these risks and, therefore, enhance the prospects for sustained
growth consistent with the inflation target.
-----------------------

According to others, because we now owe so much more than ever before, a
small rise will hit us all harder than a large one on smaller
borrowings. I reckon it's just a case of the RBA not wanting to put the
brakes on too fast. Look what happen last time they did that--there was
a bust fast.

Jas



To paraphrase Charles Mackay - By the vile arts of stock-jobbers!
 
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W

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Reply: 3
From: Peter Davidson


.25%, is the RBA serious. This will do nothing but push the demand for houses up, before interest rates go up even further. No bust and very healthy Capital gain increases for at least another 3-4 years I think. Everything else is to uncertain at the moment, except for you guessed it, bricks and mortar.
 
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Reply: 3.1
From: Robert Forward


Hmmm, with the masses jumping into property (like they have been for awhile now) and everyone jumping out of the share market right now this is an interesting event.

With some of the biggest names companies taking a blood bath recently in the share market ie: TLS was $5.50 4-6 weeks ago now $4.70, AMP was $19 4-6 weeks ago now $16.70, NCP was $15.00 2-3 months ago now $11.70 just to name a few.

My real point in all this is who is following the herd and who is leading the herd. Is the herd currently jumping into property?? Or is the herd jumping out of shares??

What about those that go in the opposite direction to the herd, how are they going to end up?? It's interesting times, at least I know where my portfolio is going. And that is UP. Yipee.

Cheers,
Robert

Property Inspection Reports @
http://www.creativefinance.com.au

The Sydney "Freestylers" Group Leader.
 
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Reply: 1.1
From: Nigel W


On 5/8/02 1:03:00 PM, Sim' Hampel wrote:

>What inferno ? The rate rise was
>designed to increase the cost of finance
>in order to keep the economy from
>overheating... not specifically the
>property market. More of a "slight touch
>on the brakes" to keep things under
>control in my opinion.
>
Sorry Sim'. Perhaps I didn't explain myself. I understand the economic theory behind the rate rise and your observation of it being a slight touch on the brakes is indeed accurate.

The contrast I was trying to put across is that the Melbourne and Sydney markets ARE still very HOT (ie an inferno) and this minor increase in the cost of finance is not going to slow the property market (nor probably the wider economy). To the contrary I suspect people will keep piling into residential property until we hit a rates of about 9%.

Cheers
N.
 
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Sim

Administrator
Reply: 3.2
From: Sim' Hampel


On 5/8/02 2:11:00 PM, Peter Davidson wrote:
>.25%, is the RBA serious.
>This will do nothing but push
>the demand for houses up,
>before interest rates go up
>even further.

Peter, do you really think that people will buy now "before interest rates go up even further" ? Are people really that ignorant of how this works ? It's not as if we are trying to beat a price rise... interest charges are an ongoing expense !

The only rationale I can think of for this argument is that people will buy now and fix their rates immediately, thinking that fixed rates will surely go up even more than they already have ? The argument doesn't make any sense to me when considering variable rates.

What do you think ?

 
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Sim

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Reply: 1.1.1
From: Sim' Hampel


On 5/8/02 2:47:00 PM, Nigel W wrote:
>
>The contrast I was trying to put across
>is that the Melbourne and Sydney markets
>ARE still very HOT (ie an inferno) and
>this minor increase in the cost of
>finance is not going to slow the
>property market (nor probably the wider
>economy). To the contrary I suspect
>people will keep piling into residential
>property until we hit a rates of about
>9%.

I'm interested in why you think this way Nigel ? What makes you think it will take that much of an increase to slow things ?

 
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Reply: 3.2.1
From: Nigel W


Sim, Sim, Sim

You expect way too much rationality from the herd! :)
 
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Reply: 4
From: Always Learning


Below is a extract of some of Warren Buffet's "wisdom" as it applies to the stock market. This is plenty in there for IP investors to take note. I like the saying "Market is Manic Depressive". Or as Kiyosaki says "The bull comes up the stairs but the bear goes out the window". IMO, Rental yields IMO are too low in Melbourne and Sydney to be maintained over the long term especially with further increases in interest rates.

<p> From extensive research obtained from gazing at the lint trapped in my navel, my 2cents worth is that that a 25point rise and the specter of further moderate increases wont result in a rush from property! However if this was coupled with other "bad" news, we will see prices stagnate (Mel, Syd). To actually get a "crash" there needs to be something else, something that we don't know about and don't expect. But such "don't know" and "don't expect" stuff happens on a regular basis!



<hr>



Commonly Referred To Sayings of Warren Buffett



<ol>

<li> The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price.



<li> Never invest in a business you cannot understand.



<li> Risk can be greatly reduced by concentrating on only a few holdings.



<li> Stop trying to predict the direction of the stock market, the economy, interest rates, or elections.



<li> Buy companies with strong histories of profitability and with a dominant business franchise.



<li> You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.



<li> Be fearful when others are greedy and greedy only when others are fearful.



<li> Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.



<li> It is optimism that is the enemy of the rational buyer.



<li> As far as you are concerned, the stock market does not exist. Ignore it.



<li> The ability to say "no" is a tremendous advantage for an investor.



<li> Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.



<li> Lethargy, bordering on sloth should remain the cornerstone of an investment style.



<li> An investor should act as though he had a lifetime decision card with just twenty punches on it.



<li> Wild swings in share prices have more to do with the "lemming- like" behaviour of institutional investors than with the aggregate returns of the company they own.



<li> As a group, lemmings have a rotten image, but no individual lemming has ever received bad press.



<li> An investor needs to do very few things right as long as he or she avoids big mistakes.



<li> "Turn-arounds" seldom turn.



<li> Is management rational?



<li> Is management candid with the shareholders?



<li> Does management resist the institutional imperative?



<li> Do not take yearly results too seriously. Instead, focus on four or five-year averages.



<li> Focus on return on equity, not earnings per share.



<li> Calculate "owner earnings" to get a true reflection of value.



<li> Look for companies with high profit margins.



<li> Growth and value investing are joined at the hip.



<li> The advice "you never go broke taking a profit" is foolish.



<li> It is more important to say "no" to an opportunity, than to say "yes".



<li> Always invest for the long term.



<li> Does the business have favourable long term prospects?



<li> It is not necessary to do extraordinary things to get extraordinary results.



<li> Remember that the stock market is manic-depressive.



<li> Buy a business, don't rent stocks.



<li> Does the business have a consistent operating history?



<li> Wide diversification is only required when investors do not understand what they are doing.



<li> An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of that business.



</ol>
 
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Reply: 3.2.2
From: Jas


> From: "Sim' Hampel" <sim@hampel.com.au>

> On 5/8/02 2:11:00 PM, Peter Davidson wrote:
> >.25%, is the RBA serious.
> >This will do nothing but push
> >the demand for houses up,
> >before interest rates go up
> >even further.
>
> Peter, do you really think that people will buy now "before interest
rates
> go up even further" ? Are people really that ignorant of how this
works ?
> It's not as if we are trying to beat a price rise... interest charges
are
> an ongoing expense !

But for a lot of people coming into the market, this is all new. They
hear from the estate agents "buy before interest rates go up" and so
they do. QUICKLY!!!! Before something else happens!!!

If you stop to think about it, no it doesn't make sense. But the whole
idea is to get people hyped up and not thinking.


Jas

To paraphrase Charles Mackay - By the vile arts of stock-jobbers!
 
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Reply: 1.1.1.1
From: Nigel W


On 5/8/02 4:14:00 PM, Sim' Hampel wrote:
>On 5/8/02 2:47:00 PM, Nigel W wrote:
>>

>I'm interested in why you think this way
>Nigel ? What makes you think it will
>take that much of an increase to slow
>things ?
>
>
Sim, it's a combo of my gut feel and some back of the envelope maths... :^)

the way I figure it, on say a $200K loan, the difference between say 6% and 9% is $6K per year. That's an increase of about $115 per week. I suspect that most investors (and I think the ABS has profiled them as not being on particularly high incomes relatively speaking) will feel the pinch to find an extra $100+ per week to feed an expensive investment property habit. Worse still if it's already chewing up their Free Cash Flow.

Now I realise that it's not that simple when any tax benefits are taken into account etc but I think that if/when rates hit 9%, all else being equal (which it never is) then distressed sales will become more prevalent.

Conversely just at this stage of the cycle, with a minor rise in int. rates people will do as people have always done, namely try to jump on the property bandwagon once its too late.

I'm interested to hear the views of those more inclined to hard number crunching!!!

N.
 
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Sim

Administrator
Reply: 1.1.1.1.1
From: Sim' Hampel


On 5/8/02 5:58:00 PM, Nigel W wrote:
>
>Sim, it's a combo of my gut feel and
>some back of the envelope maths... :^)

Fair enough... good argument, I would tend to agree with you about the $100pw figure... that's more than most people I know have as spare cash lying around... especially since they're already paying significant mortgage repayments and/or IP interest.

Any economists (or accountants who use real numbers) out there care to comment ? Or anyone else with an opinion of course !

 
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