What will interest rates peak at this time ?

What will be the highest SVR in 2010 ?

  • <6%

    Votes: 6 6.1%
  • 6%-7%

    Votes: 28 28.6%
  • 7%-8%

    Votes: 42 42.9%
  • 8%-9%

    Votes: 12 12.2%
  • >9%

    Votes: 10 10.2%

  • Total voters
    98
  • Poll closed .
Glenn Stevens speech of 15th Oct caused the market & economists to rethink their Cash Rate expectations for 2010.

It's starting to look like we'll have +1.5% over the next 6 months, and a further +0.5% by this time next year....



...that'll mean a SVR of ~8% (or 7.25% after pro-pack discount) in Oct 2010. And the market isn't expecting it to stop there, with further rises likely. By then I'd expect the rest of the world (US & Europe) to be in recovery mode.

However, some economists see good reasons for a pause in rates in mid 2010. Westpac has recently upgraded its IR expectations, but not as high as the market expects....

Westpac said:
  • After the cash rate reaches 4.5% the standard variable mortgage rate will be around 7.3%. In the previous rate hike cycle we found that once the SVMR exceeded 7% households were extremely sensitive to rate hikes......
  • Previous housing recoveries have been largely driven by demand and the supply of credit has adjusted to accommodate demand. In this recovery the supply of credit will be a significant constraint.....

    ...
  • Debt servicing ratios for Australia’s household sector will rise quickly.....
The market has a better track record than the economists.

The big banks have not committed to follow the RBA, they've reserved the right to increase more.

So, the question is.... what's the highest the SVR will get to in 2010 ?
 

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I have said 6-7% because the increase from 5% to 7% (lowest rate after pro-pact discount) represents a 40% increase in payments.

This is higher than when interest rates went from 6.75% to 8.75%...which represents a about a 30% increase.

Also IR increases will bite harder now as households are more indebted now than before.
 
Keith, with respect, what the RBA says and what is does can be two different outcomes.
My feeling is that the RBA is still trying to jawbone by warning that they will increase IR if necessary.
There was a great article by Charlie Aitken about how longer term currency traders should take a hint by following RBA currency trades.

IR are DEFINATELY going up, but to what level?????
The street can make its predictions, but personally, i dont think we will be going to anything above a neutral setting. Not until global economic growth becomes more sustained.
 
I think the RBA is on some very good pills. What exaclty are they tackling? Is house price control their number 1 mandate now?
 
I voted between 7-8% and assume a time horizon of 18-24 months.

The RBA's rush to more "normal" or "neutral" cash rates say 5.5% or 5.75% to avoid our economy over-heating in the near term (especially housing) may not end up being as punishing as they proclaim.

Our banks have widened lending margins off their own bat, regardless of what the RBA has motioned. Also combined with the lower (tighter) availability of credit might not see the cash rate go higher than 6%.

Rates will likely go up faster than we think, but lower than we fear. I reckon it is the latter element; the fear of much higher rates that the RBA wish to convey to the masses to be more diligent with their discretionary spending choices. Scare 'em a little, with an agressive fight, but not a full knock-out punch
 
I think the RBA is on some very good pills. What exaclty are they tackling? Is house price control their number 1 mandate now?

No but having a country bulging with debt - household debt is. The greater the ratio of household debt to GDP, the slower the ecomomic recovery and the greater the chance of a country collapsing. RE Iceland, Latvia, Ireland etc

One could also argue that house prices should be integrated into inflation figures but thats another issue.

Interest rates will return to the norm within 12-18months.
 
No but having a country bulging with debt - household debt is. The greater the ratio of household debt to GDP, the slower the ecomomic recovery and the greater the chance of a country collapsing.

even this is a long bow to stretch under the guise of 'monetary policy'. Household debt is decreasing anyway, removing surplus income from individuals will hamper their ability to save.

I'm with Strannik... we should also be discussing how low rates will go when we have the recession we didn't have to have. All because Stevens has suddenly decided he is against property price increases (but doesn't want them to fall because past increases good, future increases bad??!!).

madness...
 
was listening to somehting yesterday talking about the collapse of the US financial system and that US banks are likely to be nationalised. What are others thoughts on the likelihood of that happening here? if our zombie banks continue to refuse to lend to developers, business etc... however I think Aussies are generally too conservative for that to happen, I think our govt would prefer to slide into a massive recession than to tackle the banks directly. They couldn't even get Rudd Bank off the ground.

So we have a central bank tackling asset inflation when the real game is consumer inflation and asset deflation. Our rapidly escalating dollar is an interesting spanner tho. Prehaps it's deflation all round accompanied by rising interest rates. The worst possible outcome for property investors

there are so many variables it really is hard to see where this is heading
 
AUSPROP i think you are over reacting. The RBA is learnt a very good lesson from the US about the asymmetric risk of tampering with interest rates.
ie when a country gets into economic difficulty it rapidly reduces interest rates to stimulate the economy, but when the risks of economic difficulty decline there is pressure not to increase the interest rates upwards at the same rate.

Lets take a simple scenario:
Lets assume the RBA leaves interest rates at 3% because inflation at this stage is not a problem.
Gradually the market will adjust to the interest rate of 3%. In the form of residential interest rates and prices lets assume borrowers gradually adjust their ability to buy based on say 10% equity 90% debt on new purchases at an interest rate of say 5% (including bank margins, bank funding costs ect).

Lets say the borrower can 'afford' repayments of $3000 per month. Therefore the affordable market price of a property cuts off at (($36,000/0.05))0.9=$800,000. Im keeping things very simplistic here.
So overtime the underlying demand for property would push the price up to a ceiling of $800,000 if the market believed that 3% RBA rates were sustainable.

Now lets fast forward a few years.
What happens if inflation starts to build. The RBA would be forced to act and increase interest rates, but what would be the effect on the financial system, property owners, and property prices?
If we run the above numbers with an interest rate of 7% to the borrower (ie 2% of interest rate rises), the ceiling price drops to (($36,000/0.07))0.9=$570,000.
Therefore if any borrower defaulted the 'new' borrower would only be able to pay a ceiling price of $570,000, hence a big risk of a property crash and all the financial consequences associated with that.

What happens if inflation doesnt build. Well the market is already 'used' to an RBA interest rate of 3%. The next time an exogenous shock happens to the economy, the RBA would have to drop interest rates below 3%, because the 3% is the new 'norm'.

Eventually we get to the scenario in the US where interest rates are at 'zero' and the Fed is forced to 'buy' debt to keep interest rates low.

The RBA has stated quite clearly that rate settings below 4% were only meant to protect the economy during a period of significant uncertainty and risk. Now that that uncertainty and risk is declining, interest rate settings should adjust accordingly.

Its not because of immediate risk of inflation that interest rates are rising, its to avoid the asymmetric risk associated with keeping interest rates too expansionary for too long.

In the short term increases in interest rates will hamper the potential economic recovery in australia, but over the medium term it will increase the sustainable economic growth rate.
 
was listening to somehting yesterday talking about the collapse of the US financial system and that US banks are likely to be nationalised. What are others thoughts on the likelihood of that happening here? if our zombie banks continue to refuse to lend to developers, business etc... however I think Aussies are generally too conservative for that to happen, I think our govt would prefer to slide into a massive recession than to tackle the banks directly. They couldn't even get Rudd Bank off the ground.

Our banks are pretty secure and not facing the possibility of nationalisation though. :confused:

The worst of the GFC is over, they've still been making profits, there is talk that they'll be writing back $B's of their doubtful debt provisions from last year, they capital adequacy ratio's (correct term?) are more than enough - in fact high enough that there's also talk they'll need to start spending some cash on acquisitions soon or start returning capital to shareholders to avoid lazy balance sheets.

All these together should see the situation begin to normalise next year with increased business lending again.

But that's just my theory. Either way though - very far from bank nationalisation.
 
AUSPROP i think you are over reacting. The RBA is learnt a very good lesson from the US about the asymmetric risk of tampering with interest rates.
ie when a country gets into economic difficulty it rapidly reduces interest rates to stimulate the economy, but when the risks of economic difficulty decline there is pressure not to increase the interest rates upwards at the same rate.

Lets take a simple scenario:
Lets assume the RBA leaves interest rates at 3% because inflation at this stage is not a problem.
Gradually the market will adjust to the interest rate of 3%. In the form of residential interest rates and prices lets assume borrowers gradually adjust their ability to buy based on say 10% equity 90% debt on new purchases at an interest rate of say 5% (including bank margins, bank funding costs ect).

Lets say the borrower can 'afford' repayments of $3000 per month. Therefore the affordable market price of a property cuts off at (($36,000/0.05))0.9=$800,000. Im keeping things very simplistic here.
So overtime the underlying demand for property would push the price up to a ceiling of $800,000 if the market believed that 3% RBA rates were sustainable.

Now lets fast forward a few years.
What happens if inflation starts to build. The RBA would be forced to act and increase interest rates, but what would be the effect on the financial system, property owners, and property prices?
If we run the above numbers with an interest rate of 7% to the borrower (ie 2% of interest rate rises), the ceiling price drops to (($36,000/0.07))0.9=$570,000.
Therefore if any borrower defaulted the 'new' borrower would only be able to pay a ceiling price of $570,000, hence a big risk of a property crash and all the financial consequences associated with that.

What happens if inflation doesnt build. Well the market is already 'used' to an RBA interest rate of 3%. The next time an exogenous shock happens to the economy, the RBA would have to drop interest rates below 3%, because the 3% is the new 'norm'.

Eventually we get to the scenario in the US where interest rates are at 'zero' and the Fed is forced to 'buy' debt to keep interest rates low.

The RBA has stated quite clearly that rate settings below 4% were only meant to protect the economy during a period of significant uncertainty and risk. Now that that uncertainty and risk is declining, interest rate settings should adjust accordingly.

Its not because of immediate risk of inflation that interest rates are rising, its to avoid the asymmetric risk associated with keeping interest rates too expansionary for too long.

In the short term increases in interest rates will hamper the potential economic recovery in australia, but over the medium term it will increase the sustainable economic growth rate.

Please submit your response to every major newspaper/media outlet to be published for a period of no less than 28 days so people can understand this issue.

A brilliant example of how the system works.
 
AUSPROP i think you are over reacting. The RBA is learnt a very good lesson from the US about the asymmetric risk of tampering with interest rates.
ie when a country gets into economic difficulty it rapidly reduces interest rates to stimulate the economy, but when the risks of economic difficulty decline there is pressure not to increase the interest rates upwards at the same rate.

Lets take a simple scenario:
Lets assume the RBA leaves interest rates at 3% because inflation at this stage is not a problem.
Gradually the market will adjust to the interest rate of 3%. In the form of residential interest rates and prices lets assume borrowers gradually adjust their ability to buy based on say 10% equity 90% debt on new purchases at an interest rate of say 5% (including bank margins, bank funding costs ect).

Lets say the borrower can 'afford' repayments of $3000 per month. Therefore the affordable market price of a property cuts off at (($36,000/0.05))0.9=$800,000. Im keeping things very simplistic here.
So overtime the underlying demand for property would push the price up to a ceiling of $800,000 if the market believed that 3% RBA rates were sustainable.

Now lets fast forward a few years.
What happens if inflation starts to build. The RBA would be forced to act and increase interest rates, but what would be the effect on the financial system, property owners, and property prices?
If we run the above numbers with an interest rate of 7% to the borrower (ie 2% of interest rate rises), the ceiling price drops to (($36,000/0.07))0.9=$570,000.
Therefore if any borrower defaulted the 'new' borrower would only be able to pay a ceiling price of $570,000, hence a big risk of a property crash and all the financial consequences associated with that.

What happens if inflation doesnt build. Well the market is already 'used' to an RBA interest rate of 3%. The next time an exogenous shock happens to the economy, the RBA would have to drop interest rates below 3%, because the 3% is the new 'norm'.

Eventually we get to the scenario in the US where interest rates are at 'zero' and the Fed is forced to 'buy' debt to keep interest rates low.

The RBA has stated quite clearly that rate settings below 4% were only meant to protect the economy during a period of significant uncertainty and risk. Now that that uncertainty and risk is declining, interest rate settings should adjust accordingly.

Its not because of immediate risk of inflation that interest rates are rising, its to avoid the asymmetric risk associated with keeping interest rates too expansionary for too long.

In the short term increases in interest rates will hamper the potential economic recovery in australia, but over the medium term it will increase the sustainable economic growth rate.

I agree Chillia - I have to say a fantastic post and summation of what the Reserve Bank is trying to achieve.
 
only that RBA doesn't care about real estate as such, it looks at the bigger picture. and falling property prices will reduce inflation, so in effect achieve what RBA wants
 
only that RBA doesn't care about real estate as such, it looks at the bigger picture. and falling property prices will reduce inflation, so in effect achieve what RBA wants

I believe rents will rise strongly in the wake of the housing supply that has been cut since the banks stopped wanting to be banks. This is yet to show up as the stock hitting the market now is all pre GFC. Rising interest rates will exacerbate this as investors and potential new home builders stay away from the market

also I disagree that they don't care about the property market... I would say at the moment it is their primary focus. In clobbering house prices they will stall the economy
 
Our banks are pretty secure and not facing the possibility of nationalisation though. :confused:

The worst of the GFC is over, they've still been making profits

the commentator (remembering it was US centric) was saying the US banks will need to be nationalised because they are refusing to lend to the real economy. the money supply is expanding but only between the treasury, the fed and the banks, which is useless. the banks are doing very nicely - lending the money back to where it came from! truly weird. This situation can be extrapolated to Oz... at least the banking monopoly here is lending to some extent for secure resi housing for mums and dads, but they aren't lending for economic development. will the govt tolerate this? yes I think they will. It will handbrake the economy but I think we can stumble along thru it. the consequences we can live with... GDP flat, unemployment higher than necessary. but Oz has other issues to deal with. I can't see any scenario tho that has IRs as part of it, other than (a) the US breaks the deadlcok of it's trapped moeny supply and the inflation genie is released or (b) the resources mega boom takes its grip. It is WAY too ealry to be reeling these in.
 
ps... I hope I am wrong. I hope that by some miracle Australia is the goldilocks economy that defies the western world and in the face of an international trade meltdown we are doing so fine that we can put interest rates up.
 


...

So, the question is.... what's the highest the SVR will get to in 2010 ?
Been thinking about this for a while now,plus i'm in the final stages of last fin year "Tax",going through all the files to find a BCC rates bill from last year,then from one of the old folders from the early 1990's falls a Account Statement from OCT94,how times fly:),the interest rate back then on the loan trimmer account was 9.55,half way down the statement in small print
"please note from 19-dec-1994,your interest rate will be 10.55,back then
we had a ppor,and 2 investment properties,total debt was over 100k total payments every 2 weeks was over $1500,interest paid was around a quater of the $1500..per month,was always very hard to get a loan back then,wife stayed at home with 3 young girls and i was working 100 hours plus each week,I was not that smart back then,no internet,only a smart accountant who took me under his wing and helped me understand the way the system works:)..


Fast track too today,my opinion this time next year the rates will be above 8%,the same government will be in place,unemployment will be also high,if the way the media spinners play on a very small ,25% rise in interest rates then once you see each month from now till the middle
of next year, till they are at the levels the RBA want,sometimes you have too step back and have look at where you are at,and act on what you think,i have seen what high interest rates have done too Australia,and also seen what low interest rates have done,just have self-confidence
in your self because at the end of the day that's all it comes down too.
imho willair..
 
Been thinking about this for a while now,plus i'm in the final stages of last fin year "Tax",going through all the files to find a BCC rates bill from last year,then from one of the old folders from the early 1990's falls a Account Statement from OCT94,how times fly:),the interest rate back then on the loan trimmer account was 9.55,half way down the statement in small print
"please note from 19-dec-1994,your interest rate will be 10.55,back then
we had a ppor,and 2 investment properties,total debt was over 100k total payments every 2 weeks was over $1500,interest paid was around a quater of the $1500..per month,was always very hard to get a loan back then,wife stayed at home with 3 young girls and i was working 100 hours plus each week,I was not that smart back then,no internet,only a smart accountant who took me under his wing and helped me understand the way the system works:)..



Fast track too today,my opinion this time next year the rates will be above 8%,the same government will be in place,unemployment will be also high,if the way the media spinners play on a very small ,25% rise in interest rates then once you see each month from now till the middle
of next year, till they are at the levels the RBA want,sometimes you have too step back and have look at where you are at,and act on what you think,i have seen what high interest rates have done too Australia,and also seen what low interest rates have done,just have self-confidence
in your self because at the end of the day that's all it comes down too.
imho willair..

Like your experience -- if you can specify a bit more on the rate changes (to month) - against the house price change.
 
i think if the media play too much on it, we may sentiment rule the day yet again - with business and consumer spending dropping with falling confidence.

we'll then hear of "business activists" lobbying the RBA to lower IRs again.

i see a cycle. except it's much faster now.
 
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