What will an Interest Rate drop do??

D

davids

I have spent the morning reading all the financial commentary on the likelyhood of an interest rate cut. Most commentators are warning investors that the property market is already overheated and a fall is immenent. I am not so sure. As stated many times in this forum the property market is made up of hundreds of separate markets. I still believe that if the fundamentals of any invesmtent are right, then any time can be a good time. It is interesting though how desperate many in the government and paperss are now peddaling a doomsday senario. I do find it funny that they believe most property investors see the last couple of years of growth as normal and expected to continue indefinately. Of course not, but hey, it has been damn good fun. Anyway this is just a small rant from an infrequent poster :D
 
Lower interest rates will mean I can pay more off my PPOR giving me more equity quicker. It will also lower costs for IO loans, which will help cashflows - so it's all good as far as I can see.
 
Hiya

It may cause a lot of people that have locked rates in over the last 12 months to be quite negative :O(

The benefit of 20/20 hindsight is a wonderful thing .............

Ta

rolf
 
Yeah, though they aren't really loosing any extra money. It was a risk in return for piece of mind. They still have the piece of mind, and their budget is still intact. I would be feeling more of a missed opportunity feeling than a loss feeling if I had fixed my loans.

I took a risk keeping my loans as variable because I did my budget based on 8.5% interest rates and as long as rates didn't go above that, then the flexibility associated with the variable rates was worth it for me. I certainly didn't expect rates to go down, so that's been a bonus.
 
I think the market will be very different as the one we have previously seen over the past few years. With enough dooms dayers around preaching the end our financial existence, something will give. My prediction is a slow deflation in interest in property as an investment and the usual cattle rush back to equities. All the while the people that had realistic expectations for their property investment will toil away for the next few years and reap what they sow in the future.

(note to self; need caffeen/need to leave office and breath real air/ I have never posted twice in a month let alone a day!!!)
 
Things ( people ) will only give when they get hit by a truck.

Otherwise why would people pay 240 for an ex housing commision house in MT Druitt that rents for 180, and would have sold for 70 about 3-4 years ago ? The return sucks and the likelihood of significant growth is minimal ( IMHO )

That is not the decision of someone who is thinking logically about property investment.

But people are still doing it.

The market will continue on until rates go up , or unemployment goes up .

If the government was serious about trying to do something they should be getting the banks to vary their lending policies , but that would be interfering with the free market. All they have suggested is allow institutions to put their own equity into property which will only have the effect of pushing prices up even further.

There may well be a big crunch coming but it aint here yet. The economy isn't looking as healthy BUT most people won't change their plans until they are HIT BY A TRUCK...* financial type truck )

The sensible people see the truck coming and get out of the way , but that is only a small %. It probably includes most people on this forum

see change
 
Agree see change; I have checked the brakes and airbags, and made sure my seat belt is on :D

'Expect the best and prepare for the worst' should be everyone's motto.

regards, MC
 
An interest rate drop will do one of two things.

1) Supply people and businesses with more income to spend on goods and services, which will help stimulate the economy and increase GDP, and encourage businesses to invest more. This is what the RBA hopes to do with any rate cut.

2) Enduce property investors to borrow more money, since they now have better servicability. This is what the RBA doesn't want to happen, because it will fuel the property boom even more, from what i've read this is pretty much the only reason rates haven't fallen yet - McFarlane is waiting for indications that property has cooled down before he chops rates 25 or 50 base points.
 
Agree with SC on this one- people are now so conditioned to accepting such paltry returns that anything over 4% is seen as a great buy! I recall renting out our first IP at $150 p/wk (purchased for $125K) in 1990, and thinking at the time that we could have done better....

As Rolf says, hindsight is a wonderful thing... who could have predicted such low interest rates by now? With low inflation, an employed economy and more interest in property investment than ever before, it all makes for an interesting cocktail. What will happen?

Have we had this combination of factors before? Low interest rates, good employment, low inflation, deregulated lenders, record prices and growth (read:boom), poor rental returns, increased stimulation of market by investors...

It would be interesting, too, to revisit Jan's original figures of what percent of the pop. actually invest in property, and compare them to today's figures. In her book, she cites that, of the 6.5% of the pop. who currently have IP's, 5% of these own one, 1% own 2 and only .5% of the pop. own 3 or more. With all this recent interest, does anyone know if these figures have changed?
 
i fixed at 7.5% for 10 years, and sadly the rates have dropped again BUT i would do the same again for peace of mind

if you can afford it you know you will still be able to afford it in 9.5 years time.

it also helps with planning the next purchase, coz you know exactly what you can afford.
 
I think a drop in rates will bring more marginal borrowers (owner occupiers & investors) into the market. People will re do their sums on a lower rate and think "great, we can finally afford to enter the market". or possibly spend more for that bigger house or nicer area than they previously would have.

When rates inevitably rise, there will be more pain and some not happy stories, especially maybe foreclosures on family homes.

The sobering fact i keep in my mind at all times is that the average interest rate for the last 30 years is about 9.5% - 10%.

But the RBA has to lower rates - as much as it doesnt want to - to be inline with world markets. Interesting times ahead i reckon.
 
Interesting time is ahead is for sure aren’t they always … Another thing is average interest… If current low interest stays as it is or drops for about 3 years, it will make average interest rate for the last 30 years about 8.5-9% or so. Will it tell us something in 2006? Don’t think so. I am not sure if average interest is a good indicator of anything. Lastly, why RBA has to lower the rate to be inline with the world market? If RBA doesn’t want to cut the rate it will not, and if it will the reason will mainly to do with Australian economy (drought, war expenses etc.)
 
Why is the RBA even considering dropping interest rates at the moment when the property market is so overheated?

Is it because they can see that bus coming?

If I remember correctly, it wasnt the high interest rates in 1991 that killed the housing boom. I bought my PPOR at that time and despite 18% interest rates the mortgage was still affordable. I needed a place to live in no matter the cost and I still had a job!

It was the ensuing recession (and LACK OF or THREAT TO jobs) that forced people to have to sell, thereby switching the supply/ demand equasion at that time. Interest rates had dropped considerably by then.

Look at the number of posts in this forum that are asking the question about the end of the boom! Surely this speaks volumes!

Most buyers are paying top dollar now for no other reason than the fear of MISSING OUT!

And new type sales methods ( i.e. scams) such as "Set Sale" are forcing buyers to pay much more than market rate again for no other reason than -MISSING OUT!

God help us if ALL agents were to start using this method. Great for sellers. Positively sucks for buyers. Can only lead to a bigger boom wich ultimately means a bigger bust.

Piss poor yeilds are tolerable as long as there are prospects of strong capital growth but how much longer can we seriously expect to see this go on for? And with everyones credit cards maxed out, how much further can prices rise before the banks say sorry- thats all we can lend you.

And the lifestyle T.V. programs have certainly done their bit to draw in the suckers!

Cheap interest rates are only one side of the story! Employment/affordability is the other side and there is no guarantee that Australia wont follow the lead of other countries into recession or even deflation, especially given that the drought and strong AUS dollar are yet to be factored into the house price equasion. Cheap interest rates mean nothing if you dont have a job!

Without even considering the prospects of higher interest rates, me thinks the peak is now and I will be watching the employment rate very closely from now on.

JOHN
 
Because most mortgages are for 25-30 years, this is the measure the banks use as the average rate over the life of a loan. Rates might be 6% now but i bet in 25-30 years you look back at the average of the rates you have paid for that loan and it will be 9-10%.

I dont know what you mean by "will it tell us something in 2006" but id say the banks know what they are doing. I expect rates to be about 9% in 2006.

We have had higher interest rates than the rest of the world lately and foreign investment money has been pouring into the country. Besides that, the RBA is concerned about deflation and will cut rates soon, even at the risk of prolonging the property boom, which it has been talking down of late.

Europe, Asia and the States are at very real risk of deflation at the moment and we are part of world markets.
We are not immune to whats happening in the rest of the world.
(Germany had negative growth last quarter, for a financial /economic powerhouse to have neg. growth is a worry)

When fixed rates are below variable is enough indication for me.





Originally posted by Mikhaila
Interesting time is ahead is for sure aren’t they always … Another thing is average interest… If current low interest stays as it is or drops for about 3 years, it will make average interest rate for the last 30 years about 8.5-9% or so. Will it tell us something in 2006? Don’t think so. I am not sure if average interest is a good indicator of anything. Lastly, why RBA has to lower the rate to be inline with the world market? If RBA doesn’t want to cut the rate it will not, and if it will the reason will mainly to do with Australian economy (drought, war expenses etc.)
Click to expand...
 
Averages work sometimes very well sometimes don’t work at all. The 30 years average rate could vary significantly depending where we are. For example, this average figure was different in 1991 compare to 2001 and it will be different again in 2006. In 1991 the average was more likely higher that 10% (I didn’t check just assume). The rate stays well and truly below 10% since 1992/93. This is 10 years or 30% of the average period which is substantial. My view that interest rates average is a pretty poor indicator to rely on.

I agree that banks mostly know what they are doing. Why do you expect rates to be around 9% in 2006? Look at the banks fixed rates now – 10 years fixed – 7.5% ! 3 years fixed - 6.1% . So, banks obviously do not expect 9% in 2006. I am not saying it may not happened, but still 9% in 2006 is very bearish.

Regarding deflation, this is the first time I hear Australia has this threat. We are quite away from it. The inflation was in the upper RBA limit of 3% for a while.

I always had an opinion if foreign capital inflows into the country this is good, rather than bad. Many countries starve to achieve that including Australia. I don’t believe Oz had too much of inflow due to higher cash rate.

When fixed rates (longer than 1-2 years though) lower than variable rate it is a good indicator to me too. The big question usually is – to fix now or wait on variable longer. I am fixing now…
 
Mikhaila

The point i was trying to make is that when a lot of people sign up for a 25-30 year mortgage at the curent rate of 6%, they think its great that they can afford it. But we all know the reality is that they will be paying 9-10% over the life of their loan and need to allow for that. That why the banks use it.

If you think huge foriegn investment or currency trading is great for an ecomomy, tell that to the Thai government after what Gerorge Soros did to their economy. In fact they reckon he was largely responsible for the Asian economic meltdown.

I think there will be better opportunities to fix later this year/early next year. Just my opinion.
 
Hi, brains.
I'm not so sure that the banks think of mortgages as lasting for 20-30yrs.
The average turnover for mortgages in Aust is about 7 years, and their calcs. and crystal balling are probably based on this time span.
Terry
 
Hi Brains,

As far as I know banks use current variable rate plus 1.5/2% to calculate the serviceability not 9-10%. I am sure it varies from bank to bank, but if there is a bank who calculates serviceability on 9-10% now, they are loosing lots of customers. My partner works for ANZ and I know for sure they don’t use 9-10% rate in their calculations.

George Soros! I like you mentioned the name. Amazing how people blame lots of things on the man – British pound crisis, Asian crisis, US dollar fall etc. Conspiracy theoretics love to mention Soros. Common, be serious ! Yes, he is aggressive investor/speculator, sometime very aggressive. He uses legitimate ways to earn money that all it counts, and if some government stupidity/corruption/stubbornness taken advantage of I don’t feel sorry.

I stand by my view – foreign investment usually good for the economy. I’d love to see more capital inflow to Australia it means more jobs, better opportunities and healthier economy.

Currency trading is very different to foreign investment. It is just free market. If US pension funds want to drop AUD to 20cents they probably can. Question is why, at what price and how long it can stay at that level.

Originally posted by brains
Mikhaila

The point i was trying to make is that when a lot of people sign up for a 25-30 year mortgage at the curent rate of 6%, they think its great that they can afford it. But we all know the reality is that they will be paying 9-10% over the life of their loan and need to allow for that. That why the banks use it.

If you think huge foriegn investment or currency trading is great for an ecomomy, tell that to the Thai government after what Gerorge Soros did to their economy. In fact they reckon he was largely responsible for the Asian economic meltdown.

I think there will be better opportunities to fix later this year/early next year. Just my opinion.
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