What will interest rates peak at this time ?

[economist]

the later. I re-read the article. nothing much specific there. I don't subscribe to the theory but to defy such an economist when I am a mere mortal is a big call.

I think really it's to hard to see where this will all go. the forces are so huge and so unpredictable that anything could happen. the size of this resources mega-boom is so huge that it could see a wage and price explosion in this country. the dollar could go nuts. manufacturing could be killed which will see resources freed up for more productive areas. Alternatively, if the banks keep refusing to play banks then the money multiplier and the velocity of money will remain at a trickle. what if there is a new terrorist attack and there is a flight back to safety? what of the US ability to continue to pay its way? peak oil, when will this become news again?

Many opposing forces!

AP whilst one can get overwhelmed by the possibilities my position is don’t sweat the small stuff and plan for the events you can control. Firstly economics is not really that huge and unpredictable. In fact most of the time markets behaves exactly as it should and is therefore predicable. Many analysts make a living from this norm, I am one of them.

Whilst I concede the possibilities are infinite, within normal market conditions most of the events you mention would occur slowly and therefore the market would adjust. I also concede that the black swans you mention are possible although unlikely. I can’t plan for them but I can and do plan for normal economic operating conditions. Therefore my post on interest rates stands and in fact I did some more work on this today on the plane.

The last time interest rates were increasing we saw significant decreases in property prices across the board when rates got to 7.25%. Due to the lag factor in reporting it is likely that the pivot point was closer to 7%. The reserve is very aware of this and will be wary about the economy at these levels, the last thing the RBA wants is to decrease housing prices and put the banks at risk.

Whilst I do not expect this position to differ I have adjusted my numbers somewhat for inflation. As I mentioned in the previous post I expect the cash rate and the mortgage rate to be very loose until the government either expands or retracts the guarantee. Therefore the new position is, irrelevant of the cash rate, when mortgage rates reach the aforementioned 7.25% we will see some pressure on prices. That said the market can and will absorb some pressure albeit slowly. In detail my numbers show that we may well have a rapid run up to the 7.25% level however following this, the market can and will only absorb an increase of 0.75% in the next 2 years. Anything more can’t be absorbed and decreases in prices will occur.


Mike

 

[Ausprop]

nice posts above.

seems we should prepare for a SVR of about 9-10%? Allow for that, keep cashflows on an even keel and hope for the best....

 

[Aaron Sice]

http://kineticsglobal.com/economist/sites/default/files/RBA-Hold-AUD-171109.pdf

 

[economist]

http://kineticsglobal.com/economist/sites/default/files/RBA-Hold-AUD-171109.pdf

Thanks for the link BC. Fully agree with all the forecasts from Kincaid except interest rates. In three words "they are wrong". The first and foremost reason for the increases in rates are due to the aforementioned competition for money across the globe. This is something you will read about next year as the mainstream picks it up. You will also read more about the Aussie carry trade which I am heavily into atm in a roundabout sort of way.

The gold forecast is a global variable and has everything to do to with the world stage and very little to do with aussie economics. We are small fish.

Here is my asx200 forecast ATM - The market continues to look strong however the recent gains still need to be tempered prior to the next bull run. The markets should take a breather over the next 2 weeks whilst investors take profits. The strength in the market should return in the first or second week of December and the ASX 200 should test the October high of 4895 before the end of January. One of the most interesting developments in the last few weeks has seen the asx somewhat diversify from the S&P. Is this the first steps to a decoupling?

I do see some downside risk for the $A however this has more to do with a temporary strength in the $US rather than a fundamental shift in the $A. So therefore contrary to normal market conditions my forecast has a flat to very slightly weaker $A on rising rates over the next 6 months.

We will see.

 

[Gatoblanco]

Why are people saying "if interest rates go up there will be a property boom anyway"?

Interest rates can go high in the absence of a property boom cant they?

I would have thought high interest rates would decrease demand for property for both FHB and upgraders. Serviceability goes lower, they can borrow less. I.e. the 'cost of purchasing' a property goes up (not necessarily the purchase price).

 

[weg]

Why are people saying "if interest rates go up there will be a property boom anyway"?

Interest rates can go high in the absence of a property boom cant they?

I would have thought high interest rates would decrease demand for property for both FHB and upgraders. Serviceability goes lower, they can borrow less. I.e. the 'cost of purchasing' a property goes up (not necessarily the purchase price).

This is what I think also. The demand may still be there but people will be unable to pay more or are less prepared to do so.

I also think the recent surge in house prices was just as much to do with low interest rates as it was with the increase in FHB grant.

By taking both away you would think the dynamics in the housing market would change somewhat.

 

[Aaron Sice]

sorry - i just can't see SVRs getting to 7.5%+ - i try to see, i try to find - but nay'er kin be found.

 

[economist]

interest rates

sorry - i just can't see SVRs getting to 7.5%+ - i try to see, i try to find - but nay'er kin be found.

why on earth not? What do you expect over the next 12 months?

SVR @7.5% is still very low in historic terms. Like I posted earlier the pivot will be lower @ or around 7% and rates will move quickly (the RBA will not even pause for breath) to this level. Another major reason which has found press in recent months is a fear of an asset bubble. The fed in the US is now getting on this train, however they are on a different track with a different destination and will not raise rates for a while.

My concern is not if rates will rise to this level as I am certain they have to in Australia. Anybody who hasn't listened to the warnings from the goverernment (it wouldn't be ethical for RBA to take this position so the government steps in) shouldn't be in this game. My concern is how much and at what pace after this level. Like I posted earlier we can absorb (not easily but it can be done) 0.75% over 2 years after the 7% level is reached anything more would be risky.

I do not loan money in Australia so this is not a concern for me except through the flucuations in the currency.

 

[economist]

This is what I think also. The demand may still be there but people will be unable to pay more or are less prepared to do so.

I also think the recent surge in house prices was just as much to do with low interest rates as it was with the increase in FHB grant.

By taking both away you would think the dynamics in the housing market would change somewhat.

You are correct mostly. In addition there is another dynamic at work which hasn't reared it's ugly head for many years. That is the volume and velocity of money. The expansion of M3 over the last 15 years has been unprecented as will be the reaction following the decline in expansion. It not that money supply needs to decrease (it probably won't for a while yet) it just needs to decelerate to casue a problem. That is where we are, and the fuel (or money as we think of it) is rising in price.

It really doesn't take a rocket scientist to figure where this is heading with those actions in place.

 

[Aaron Sice]

why on earth not? What do you expect over the next 12 months?

SVR @7.5% is still very low in historic terms. Like I posted earlier the pivot will be lower @ or around 7% and rates will move quickly (the RBA will not even pause for breath) to this level. Another major reason which has found press in recent months is a fear of an asset bubble. The fed in the US is now getting on this train, however they are on a different track with a different destination and will not raise rates for a while.

newsflash - we're not coming out of anything "historical" where equity was created out of thin air, valued, bought, sold, then dumped.

we already have the highest IRs in the ENTIRE FREAKING WORLD with no one looking to raise anytime soon.

10% SVRs today would be the equivelant of 21% in the 80s because our ability to service debt is lower now that what it was 20 years ago. 10% SVRs would sh*tcan our entire economy and would reverse what they've been trying to reverse all along.

keating got it in one hit - bump up IRs, the strong will survive, the weak will fall, then rebuild the house of cards.

rudd is handing out cash willy nilly to make sure everyone survives, albeit only hurting a little with a tiny bit of UE rises and a bit strapped for cash. essentialy - the bailout meant nothing will change.

period. end of discussion.

 

[keithj]

we already have the highest IRs in the ENTIRE FREAKING WORLD with no one looking to raise anytime soon.

... and a correspondingly strengthening economy. Betcha the developed world wishes it had the problem of having to raise IRs . IIRC Canada, Norway and others have started to raise (or are expected to).

10% SVRs today would be the equivelant of 21% in the 80s because our ability to service debt is lower now that what it was 20 years ago.

Really ? The average new loan taken out is around $270K. That's easily serviced by the vast majority.

We withstood a 9.5%+ SVR 18 months ago, why not now ? Wages are up by around 10% since then. And in the intervening low inflation period discretionary income is up by even more. We've all still got jobs, there's v. little risk of a significant proportion of property owners being unable to service their loans.

The RBA must raise now to prevent problems in the medium term. Most of the rest of the world is focusing on the short & medium term, because their medium term looks like it's not going to be much different from their short term.

 

[Ausprop]

should add that a whole chunk of the mortgage market outside of the big 4 is already at 7.5-10%

 

[Ausprop]

You are correct mostly. In addition there is another dynamic at work which hasn't reared it's ugly head for many years. That is the volume and velocity of money. The expansion of M3 over the last 15 years has been unprecented as will be the reaction following the decline in expansion. It not that money supply needs to decrease (it probably won't for a while yet) it just needs to decelerate to casue a problem. That is where we are, and the fuel (or money as we think of it) is rising in price.

It really doesn't take a rocket scientist to figure where this is heading with those actions in place.

I don't get this post.... hasn't the collapse in velocity been the problem? So the risk is increasing velocity not decreasing velocity.

 

[economist]

newsflash - we're not coming out of anything "historical" where equity was created out of thin air, valued, bought, sold, then dumped.

we already have the highest IRs in the ENTIRE FREAKING WORLD with no one looking to raise anytime soon.

10% SVRs today would be the equivelant of 21% in the 80s because our ability to service debt is lower now that what it was 20 years ago. 10% SVRs would sh*tcan our entire economy and would reverse what they've been trying to reverse all along.

keating got it in one hit - bump up IRs, the strong will survive, the weak will fall, then rebuild the house of cards.

rudd is handing out cash willy nilly to make sure everyone survives, albeit only hurting a little with a tiny bit of UE rises and a bit strapped for cash. essentialy - the bailout meant nothing will change.

period. end of discussion.

Your post is so disjointed and misinformed it is difficult to know where to begin.

I would say that the bull run is asset prices has few historical precedents and the corresponding expansion in money supply has NO historic precents.

We do not have the highest rates in the world, far from it in fact.

I'm not even sure if your saying interest rates are going to rise or not, in any event they will. Your survival of the fittest analogy is apt for many of past economic crisis points however as mentioned earlier there are no precedents for what has occured over the last 10 years.

I agree the first to fall will be those with excess leverage, unfortunately that includes many recent home buyers not just investors.

It would be more polite to end a discussion with a none reply rather than a command, as you can observe, I don't sway easily to autocratic behaviour.

 

[economist]

I don't get this post.... hasn't the collapse in velocity been the problem? So the risk is increasing velocity not decreasing velocity.

AP, with M3 increasing exponentially so did the volocity of money. The collaspe Lemans was a turning point and as you correctly point volocity slowed down. Dramatically. I just reread mypost and your right it didn'tmake sense. ATM we still have an expanding M3 through various government stimulus packages however it means little without a turnaround in volocity.

To be honest I think many economist currently think we have a situation where volocity is unstable and prices are sticking and they predict eventually volocity will return and push up prices. This is the inflation risk you hear mentioned. I subscribe to this theory however I think the "price stick" will be a lengthy period.

 

[economist]

sorry - i just can't see SVRs getting to 7.5%+ - i try to see, i try to find - but nay'er kin be found.

We are a little closer to the 7.25% pivot after the move today. In addition as mentioned in earlier correspondance the banks are increasing above the RBA cash rate. Read all the previous posts for all the details.

On a brighter note the RBA will not meet until February!

Guard your portfolio against aggressive interest rate rises, they are not finished yet, not by a long way.

 

[Aaron Sice]

yeah i'm done - bugger CG - show me the cash.

i'm not subsidising someone elses' living standards now.

 

[economist]

yeah i'm done - bugger CG - show me the cash.

i'm not subsidising someone elses' living standards now.

BC I am still in the process of restructuring my IP portfolio. You can read that as, I'm selling 50% of my properties. 4 already finalised 2 contracted and of those 1 is very likely to sell with one a little more less certain.

The rest of the portfolio has excellent well employed long term tenants and the properties are robust.

I won't be buying for a while but I will be buying when the variables align.

Good luck with your position

Mike

 

[exsyd]

Not sure if this has been posted elsewhere:

http://www.smh.com.au/business/interest-rates-tipped-to-peak-in-2011-20091208-kgxj.html

Summary - economists predict cash rate of 5.5%.

 

[Ausprop]

Not sure if this has been posted elsewhere:

http://www.smh.com.au/business/interest-rates-tipped-to-peak-in-2011-20091208-kgxj.html

Summary - economists predict cash rate of 5.5%.

that would see a westpac SVR of about 10%!!! Still, apparanlty westpac customers dont care about price they just want that rolls royce service that they have come to know and love