Why are we rate obsessed ?

[Patosan]

I personally have always wondered why we are so obsessed with interest rates. On the forum there are continually threads being started about : Will rates rise next month ? Poll your view on likelihood or rate rise. How much higher will rates go ? ... etc, etc. Of course it's an expense, but it's unavoidable, as is it's ebbing and flowing.

This week I read that touring American conservative academic and pollster Frank Luntz said : "Interest rates are so important here; in America, we don't follow them. An interest rate rise in the States is on the front page of the business section. An interest rate rise here is on the front page of the newspaper."

In the US there's no neg gearing and rates are lower, so any rise would have proportionally much higher impact. So why such a difference in attitude to rates ? Or are we not really so concerned ?

 

[alexlee]

Partly because in the US the standard mortgage is a 30 year fixed loan, so changes in the official Fed rate really doesn't matter in terms of most mortgages. In Australia the standard loan is a variable rate mortgage, which is partly priced off the RBA rate.

Though given the subprime stuff happening in the US lately, official interest rates will be watched a lot more closely. Those ARMs ARE priced off the Fed rate.

Also, interest rates are a lot more political in Oz (largely because Johnnie made it so by convincing people that he had the power to keep rates low). In the US no one doubts that the Fed is independent, and that monetary policy really is separate from, say, the office of the president. For example, in the current presidential candidate debates, no one mentions interest rates. On the other hand, every rate rise, independent RBA notwithstanding, is blamed on Howard (his own fault for politicising it in the first place, though).
Alex

 

[alexlee]

Also remember you get interest deductions for PPOR in the US (with no purpose of funds test: i.e. I can buy a car, pay out the loan by refinancing my PPOR, and deduct interest on the FULL amount of the PPOR loan including the new refinanced amount). Given that more people own their own home than own IPs, you would think that more than evens out the no -ve gearing thing.
Alex

 

[Ausprop]

"An interest rate rise here is on the front page of the newspaper."

you must be joking, front pages are reserved for drug taking sportsmen

the 6 o'clock news is getting so bad now that I record it so that I can skip the sport at the beginning and end.

 

[WinstonWolfe]

When did the USA and Australia have 18% interest rates last?

Rates are effected by cpi which is effected by wages.

In the US, wages are kept low by a permanently permeable border allowing illegal labour (google Mexicans and fruit picking, processing, and the construction industry; and Philipinos for domestic labour). A permanent under class and anemic unions also contribute to keeping wages lower in the US.

US GDP is not as volatile as Australia's, because the US is not as heavily dependent on mining and agriculture.

Put all this together and the US hasn't historically had the same impetus to manipulate rates as violently as Australia.

 

[Sunfish]

In the US, wages are kept low by a permanently permeable border allowing illegal labour

Sorry if I'm sidetracking this thread but WW touched on a matter of interest to me.

The Yanks are the ultimate slave-masters.

In Slavery MkI they kidnapped negros and transported them to the New World. In spite of fighting a bloody war they were freed and shock! horror! they stayed to live among the gentry. They couldn't send them back!

In Slavery MkII they didn't kidnap anybody. They came of their own free will, to be exploited. (see WW's post) But they still live among them!

In Slavery MkIII they learnt a bit and paid off some Chinese Mandarins to be their slave-masters and they are as tough as any southern planters ever were. The big advantage is that the coolies stay on the other side of the Pacific, the big disadvantage is that the dollars don't.

Think about it.

 

[tubs]

I dont think rates are that hot a topic on here. Compared to the number of threads, ones about rates are very much in the minority. PMs get more attention than rates!

Whenever we have a rise, it gets discussed in passing, but its still not the most posted on for the day. Its just business as usual.

Personally, I tend to ignore them to a certain extent. Over a 25 year loan, rates are going to go up and down all the time, so the current rate is really not all that important.

 

[MarkB]

On the other hand, every rate rise, independent RBA notwithstanding, is blamed on Howard (his own fault for politicising it in the first place, though).

True, though you can't really blame Howard his blatant chest-beating on interest rates.

In the 1980's Keating owned the RBA and yet he still managed to steer this country until our biggest economic downturn since the 1930's.

M

 

[toony]

I am obssessed with interest rates as they determine what my largest expense is, in holding properties.

 

[TheAnalyst]

Also remember you get interest deductions for PPOR in the US (with no purpose of funds test: i.e. I can buy a car, pay out the loan by refinancing my PPOR, and deduct interest on the FULL amount of the PPOR loan including the new refinanced amount). Given that more people own their own home than own IPs, you would think that more than evens out the no -ve gearing thing.
Alex

Alex, I really admire you have so much knowledge. I wander why the things like in US: capital roll over, deduction on PPOR etc have not been applied here? Could it be introduced here?

 

[alexlee]

Alex, I really admire you have so much knowledge. I wander why the things like in US: capital roll over, deduction on PPOR etc have not been applied here? Could it be introduced here?

I just read a lot of stuff from the US.

There are some places where the US isn't as good. Their CGT exemption on the PPOR only comes to $250k for a single person and $500k for a married couple. For us it's unlimited. Though you could argue that unfairly helps people who buy more expensive PPORs.

If they do introduce a 1031-type law or allow deductions on the PPOR, it'll just jack up prices. With affordability the way it is, I don't see any govt putting that in.
Alex

 

[WASP]

I am obssessed with interest rates as they determine what my largest expense is, in holding properties.

True, expect more before Xmas according to the news

 

[alexlee]

Forget xmas. The fed cut rates by 50 bps last night.

I still don't think it's over, though. Those resetting loans will take a few months to grind down borrowers. Even if those new rates are lower, from 11% to 10.5% isn't much.
Alex

 

[Kennethkohsg]

Dear Alex,

1. What your own thoughts and assessment regarding Alan Greenspan's recent advice to Ben Bernanke regarding this interest rate cut?

2. What would be Ben Bernanke's real concerns when the Fed decides on this 0.5%pa. rate cute?

3. Do you think/find that the 0.5% rate cut as "realistic" or being "excessive" given the present American economic situation, at this point in time?

4. Looking forward to hearing your views and learning further from you, please.

5. Thank you.

regards,
Kenneth KOH

 

[alexlee]

1. What your own thoughts and assessment regarding Alan Greenspan's recent advice to Ben Bernanke regarding this interest rate cut?

2. What would be Ben Bernanke's real concerns when the Fed decides on this 0.5%pa. rate cute?

3. Do you think/find that the 0.5% rate cut as "realistic" or being "excessive" given the present American economic situation, at this point in time?

Greenspan told him not to, right? Talk about the pot calling the kettle black. I think by cutting 50bps this early (with no actual recession) Bernanke runs the risk that inflation will come back stronger. There's also the moral hazard of banks thinking Bernanke is going to bail them out.

His concerns, I guess, is to stave off recession. I don't think it's going to help the property market much, though. I mean, if you're going to default when your adjustable ARM hits 11%, you're still going to default when it adjusts to 10.5%.

I don't know whether it's realistic or not, because it hinges on how bad the economy will be hit, how consumers react, and whether a weakening US is going to drag other countries into recession. At this point, though, I think the USD will fall, and there will still be more foreclosures. No matter what Bernanke does I don't think he's going to spark another real estate boom. What he runs the risk of is property going down while everyone keeps spending for a while, causing inflation to spike (especially with oil at record highs).

The higher AUD will have effects on commodities companies that earn USD (i.e. all of them).

The wild card is what losses the investment banks will disclose on their mark to market positions. Pricing models can basically be played with to give whatever result you want. Lehman came out with a decent result, but is that realistic? If the other majors (Goldman, Merrill and Morgan are all reporting this week) report big losses, people will doubt Lehman's result. If they all report lower than expected losses, investors might think they're ALL blowing smoke up wall st's a*s.

The key in all of this is confidence. If people BELIEVE the CDO stuff isn't going to get worse, it probably won't. But the reality is that foreclosures are going to continue. If investors really start thinking the people who hold the mortgaged backed securities are lying about the value of those derivatives, we're going to have a sell-off.
Alex

 

[wish-ga]

I personally have always wondered why we are so obsessed with interest rates.

Because they hurt
*ouch*

 

[ianvestor]

I personally have wondered why so many people complain about interest rate rises, yet still choose to take out a variable rate mortgage.

Anything less than 10 is great!! Don't take the single-digit for granted people!

 

[steveadl]

I personally have wondered why so many people complain about interest rate rises, yet still choose to take out a variable rate mortgage.

Anything less than 10 is great!! Don't take the single-digit for granted people!

Well said. Rates don't really bother me. OK I'd prefer them to be low, but if they go higher, so what? No one is forcing me to take on more and more debt but me!