Read a very interesting article today about Interest Rates - thought I'd share it

[yieldmatters]

Its a big hit if SMcK is right especially if you own a few. How much of the increase can be passed onto the tenant?

Not much of it I think. There is a long history of rents sticking somewhere close to CPI - many renters simply don't have the cash.

I don't know who this SMcK guy is but its nice to see somebody almost exactly replicate my thoughts. My only regret is I didn't keep my place 18 months longer - its hard to pick the top. And to Alex's often made point it is also hard to pick the bottom - but I will try.

 

[Rixter]

How much of the increase can be passed onto the tenant?

All IR increases providing a clause is included in the additional clauses section of the lease agreement and signed by parties.

Its rather simple really

 

[MichaelW]

I don't know who this SMcK guy is but its nice to see somebody almost exactly replicate my thoughts.

Where've you been?

http://www.propertyinvesting.com/

He's Mr Positive Cashflow and not into buy and hold for capital gain. He attracts a large following because it's a "simple" concept. i.e. If I buy it I make money in cash. Sometimes running the numbers and factoring in capital gain can make it a little obscure for the average punter.

He'd be right up your "extremely conservative" alley. He likes a bit of doom and gloom and seems to think that trading property is OK regardless of the switching costs and property's advantage as a long term asset.

I started out over there but like to think that I graduated to Somersoft! The conversations are a lot more advanced and robust over here. We're not all chasing the latest dump in the bush with a high yield. Have a look at his forum and see how far you have to scroll down before you get to a new thread titled: "Where are all the CF+ properties?"... Or, in other words: "I'm really naiive but I like the idea of a cash return and I abdicate all responsibility for my financial future. Now that you've told me what to buy, can you also please tell me where to buy? Oh, and don't bother telling me about any other investment options or the risks associated with a CF+ strategy. Just the sugar coated version please..."

Cheers,
Michael.

 

[NedKelly]

I am out to lunch on this stuff.
I owned property back in the eighties and the thing I noticed back then from a home owner perspective was that the value of my house doubled seemingly overnight and then flattened out for a few years. The main thing I remember is that inflation had the effect of devaluing my debt. That was a good thing as I payed out my loan much quicker and realised my Ausy dream.
Devaluation of debt in my view is a great byproduct of inflation. No wonder the banks want to raise their interest rates so they can keep up with the inflationary trend. After all, when a house goes up in value by way of inflationary pressure, the bank loan on that house does not, only the interest component of the portion that is leveraged.
My thoughts on the future are : as investors we need to focus on the sustainability of our current LVR's. The more we are leveraged to harder we are hit with the interest rate rises. But the more we gain in equity from the inflationary trend. Balance is always the key.

There is nothing like a good dose of inflation to stag up property prices. Maybe we should all vote labor!

 

[FHB]

I don't get it... interest rates at 10% means underlying inflation must be running way above RBA's targeted upper band of 3% (where it is at now). Even if inflation was at 6% which is 4% below interest rates, the value of my properties should be going up at 6% but my debt stays.

That not quite the way the current monetary policy works. Inflation is not suppose to rise above 3%, so if it went up to 4% the RBA 'may' raise rates 4 times at .5 points each to bring it back down to 3%. So you will still have inflation of 3% but interest rates at ~10%. This could happen a few times and you could end up with interest rates far higher while inflation is still only 3%.

CPI has little relevance to property growth, income growth is relevant to eroding to size of debt.

 

[FHB]

Interest rates reflect inflation. Inflation goes up interest rates go up and if inflation goes down interest rates go down, well that's been my observation. Governments have a determined fixation on keeping inflation low. So the days of high inflation and therefore high interest rates are gone forever.

Not really, inflation increases when money is increased in the economy without also increasing capacity to supply goods and services. More money chasing the same level of production causes prices to rise. So if we look at the growth of money and think that perhaps production capacity hasn't kept up, then interest rates will need to rise higher to maintain the low level of inflation we enjoy today.

It doesn't make sense to say low inflation means low interest rates, if anything it means higher interest rates trying to maintain the balancing act.

 

[equitymate]

I Guess the new book will be called from 130 to 0 properties in 3.5 weeks ?

 

[Highlygeared]

I Guess the new book will be called from 130 to 0 properties in 3.5 weeks ?

ha!

btw

can someone pls explain how high inflation results in spiralling house prices? Taking a simple view, if interests rates are at 10% at current house prices, which will be very painful for the majority of average wage earners, how can they go up from there given that discretionary spending is increasing (although not necessarily on purchasing property)?

Might seem a little slow but if someone could explain with certainty why high int rates imply equally toppy house prices. Residex seems to think int rates have no impact on house prices but I cant see how this would be the case if int rates spike up very quickly catching most by surprise.

 

[markp]

It doesn't make sense to say low inflation means low interest rates, if anything it means higher interest rates trying to maintain the balancing act.

I don't think I actually said that.

The reason for higher interest rates is to maintain the balance? This is what the RBA keeps telling us. Interest rates is the only weapon the RBA has to fight inflation and keep the lid on it. What I say is to hell with that, so what if we have a little bit of inflation, it might be a good thing?

 

[simonjulie]

There is nothing like a good dose of inflation to stag up property prices. Maybe we should all vote labor!

I don't really think it matters who wins, so vote for whoever we want to. I'll just adjust my strategy accordingly although I hope whoever wins, wins by a decent margin there is nothing worse than a parliament that cannot agree. Rome will burn if there is an indecisive victory. We have a bright future and I agree with Mr McN that we need infrastructure, but I think, that is all I agree with him on. The rest is speculation.Money is like water in a way. Every drop that has ever existed is still with us it just changes it's consistency.When it evaporates from one place it falls as rain on another.
Simon

 

[FHB]

I don't think I actually said that.

The reason for higher interest rates is to maintain the balance? This is what the RBA keeps telling us. Interest rates is the only weapon the RBA has to fight inflation and keep the lid on it. What I say is to hell with that, so what if we have a little bit of inflation, it might be a good thing?

OK, I'll rephrase; the idea that the days of high inflation and therefore high interest rates are gone forever doesn't make sense.

Interest rates and inflation are not in symmetry, changes in one indirectly affect the other but they don't move up and down together under the current goals of monetary policy. I wasn't meaning to be critical, just putting my take on it forward.

A previous RBA Board member suggested recently that inflation could be allowed to run up to 7%pa in the interest of full employment. I think the problem is that once it accelerates how do you stop it, and how do you rein in the inflationary expectations that go along with it? Generally it is only a recession that does this.

 

[tubs]

Let me just get this Steve Mc thing straight.

He send out an alarmist email saying (and justifying) WHY interest rates are going up.

We all have to do something.

But what?!?!?!

*in comes the (Mc)Knight in shining armour*

"You need to be better educated. Lucky I've got a course to sell you..."

 

[markp]

ha!

btw

can someone pls explain how high inflation results in spiralling house prices? Taking a simple view, if interests rates are at 10% at current house prices, which will be very painful for the majority of average wage earners, how can they go up from there given that discretionary spending is increasing (although not necessarily on purchasing property)?

Might seem a little slow but if someone could explain with certainty why high int rates imply equally toppy house prices. Residex seems to think int rates have no impact on house prices but I cant see how this would be the case if int rates spike up very quickly catching most by surprise.

Interest rates do have an impact on house prices. But currently the property shortage is adding more to the demand than the high interest rate cost which is decreasing the demand. This is demand or growth inflation which is causing house prices to increase.

As well as demand we have cost inflation (that basket of goodies number) which also causes house prices to increase. This has a doubling effect on house prices every 7 years or so.

That's how I see it but others forumites might see it differently

I hope that is an uncomplicated answer for you.

 

[FHB]

Perhaps it is high house prices that cause high interest rates, not the other way around, and the fact asset prices are rising is an indicator of excess money in the economy?

 

[markp]

OK, I'll rephrase; the idea that the days of high inflation and therefore high interest rates are gone forever doesn't make sense.

Interest rates and inflation are not in symmetry, changes in one indirectly affect the other but they don't move up and down together under the current goals of monetary policy. I wasn't meaning to be critical, just putting my take on it forward.

A previous RBA Board member suggested recently that inflation could be allowed to run up to 7%pa in the interest of full employment. I think the problem is that once it accelerates how do you stop it, and how do you rein in the inflationary expectations that go along with it? Generally it is only a recession that does this.

Do you work for the RBA?

 

[FHB]

ha, no, just an interest I have....

 

[markp]

Perhaps it is high house prices that cause high interest rates, not the other way around, and the fact asset prices are rising is an indicator of excess money in the economy?

Well there certainly has been an excess of money in the economy of recent years. For sure~!

 

[pendo]

I Guess the new book will be called from 130 to 0 properties in 3.5 weeks ?

He sold almost 300 of them I believe to his partner Mike. Or was it Mal?
Steve is a trader not an investor. Maybe he's an investor on speed!
I often wonder about his hyperactive strategy. I bet the buy and hold strategist, has made an equal if not greater amount than young Steve has done trading in dollar terms, in the same time span. But then again, he seems to be having loads of fun$$$$

 

[markp]

A previous RBA Board member suggested recently that inflation could be allowed to run up to 7%pa in the interest of full employment. I think the problem is that once it accelerates how do you stop it, and how do you rein in the inflationary expectations that go along with it? Generally it is only a recession that does this.

Or a government that is focused more on productivity than on greater expendture policies.

 

[ffc1883_1996]

I started out over there but like to think that I graduated to Somersoft! The conversations are a lot more advanced and robust over here.

Me too! Some of those on Steve's forum will jump down your throat if you mention the use of capital gain for wealth creation.