Why is there such a PANIC (esp in the media) over small interest rate rises??

[perky29]

I think this question is more for the investors that have been around for a few cycles - has there ever been this much media hype at the mere thought of a .25% interest rate rise??
Its just seems to me that the media seem to PANIC at the thought of small interest rate rises. Yet when it got to 17% years ago when I bought my first IP - I am sure (although I was pretty young at the time) that there was no-where near as much hype about it ??
Is it because the size of mortgages are just SO LARGE nowadays?
Or is there a better reason for this hype we have experienced over the last week about when (and how much) the interest rate rise will be?

 

[Ausprop]

probably lack of other news to report on. Am sure its time for another ACA story on surging property prices, what's your home worth?, interest rate rises or the real estate crash.

I think the reason they are getting wound up is it has been so good for so long and any change is newsworthy.

 

[tubs]

Panic?

There have been about 2 rises of 0.25% in the last two years (or thereabouts) and another one (maybe two) on the way. The overall trend is basically flat. I think we will look back in 10 years time and remember how good it was.

 

[Rolf Latham]

Hiya Perky

Effective cost of money is what it comes down to in my view.

Yep, I remember those heady days if 23 % commercial finance ...................


But one must remember that was on the base of double digit inflation and wages growth, for eg the last 50 pts rises increased cost of money by 10.5 %, now that can really eat into your margins.

ta
rolf

 

[qaz]

Simple answer, we are all in more debt than we were back then and as such a small rate rise has a bigger effect on the people and the economy as a whole than previously.

 

[buzzlightyear]

Following on from qaz's comments, I think as a country today we are far more economically literate due to greater investing activity & general knowledge than 15 years ago, so that tends to contribute to the media's fascination with possible interest rate movements and anything that involves Ian McFarlane......

 

[Peter 14.7]

Following on from qaz's comments, I think as a country today we are far more economically literate due to greater investing activity & general knowledge than 15 years ago, so that tends to contribute to the media's fascination with possible interest rate movements and anything that involves Ian McFarlane......

Buzz raises a good point. I dont remember seeing all the fin news of the TV when I was growing up in Country Vic. We are more an investor nation now.


Why the panic...

I heard some report saying someone had said it could go up 3% over time ( probably BIS)

What i know is when all are running to sell is the time to buy. As someone cashed up I welcome the gloom. Opportunities await!

Peter 147

 

[StuartW]

Fear sells papers.

BIS Shrapnel consistently "predict" rate increase well about the market avergae forecast. I remember in 2003/04 they said rates were going to 10%. The press love it and always pick up the story. Funny enough they (BIS) also sell research reports... could this be a marketing plan????

 

[Peter Parker]

Yet when it got to 17% years ago when I bought my first IP - I am sure (although I was pretty young at the time) that there was no-where near as much hype about it ??

I was also fairly young back then and remember a lot more talk about housing and homelessness then than now.

Around 1988-9 there were:

- spiralling interest rates (for new loans, not old loans with the 13.5% ceiling)
- spiralling house prices ($200k for a house in Sydney!!!)
- spiralling rents

Combined with wage rises being contained (due to the ACTU/ALP Accord) housing affordability (for both tenants and buyers) was very much on the political agenda.

These economic pressures were causing homelessness and child poverty to be widespread public issues. Recall Bob Hawke's famous 1987 promise, the Family Allowance Supplement of that year, the HREOC's report into child homelessness (1989) and Archbishop Hollingworth's comments around that time.

Housing affordability was also a Big Issue in the 1988 NSW State Election where big swathes of the mortgage belt western suburbs voted in a change of government (never mind that state governments have only limited effect on property markets). Similarly there was tenant panic over the effect of the Americas cup defence in Fremantle.

I cannot see quite as much ferment now. Nevertheless it is still clearly a live issue, given Howard's success in waging a fear campaign on interest rates in 2004. Also in 2005 we don't have spiralling house prices nor spiralling rents, so there is really only one worry (interest rates) and not three as there was circa 1988.

Regards, Peter

 

[BUNDY]

Fear is also good for the Big Banks.

Thousands rush in and lock their loans into fixed interest rates due to the Media hype. Banks then make more money on the ill informed by often locking in at higher rates. Then the interest rates only go up 2.5 or.5 a percent and peolpe have locked in for 3/5 years at 1% higher.

Not suggesting this is good or bad. All comes down to individual circumstances and the "sleep at night factor".

BUNDY

 

[Peter 14.7]

Bad News Sell to most people.

Peter 147

 

[Merovingian]

Or is there a better reason for this hype we have experienced over the last week about when (and how much) the interest rate rise will be?

TV/radio ratings and newspaper sales?

 

[jsh1]

I rarely post on this forum, but have read many excellent threads.
This forum is filled with many great members - always a pleasure to read their posts.
However I feel compelled to weigh into this one.

The Facts are :
Firstly, nobody knows exactly what future interest will do. Given their are so many factors that influence the economy, a rise, steady or a fall can happen at anytime depending on the RBA's perception of the overall economy.

Secondly, there has been much talk of higher interest rates leading to pressure on people to sell their properties.
However whilst higher rates usually require higher repayments, we must not forget that now more than ever, there is far greater equity and value in the properties they currently own - it is all relative.
We need to see more reference to net worth. Instead of just debt.
If your borrowings have increased by $400,000.00 and your properties have increased by $600,000.00 are you in a better net position?

In summary, life has taught me to always view what the media reports with skepticism. Often the truth is twisted and manipulated to make the story much more sensational and interesting - the aim is always to grab the attention of the public. That is what sells papers and raises T.V ratings.

Hope this helps.

 

[quiggles]

For many intents and purposes we can usefully separate two classes of people - those who have mortgaged to the hilt to buy boats, cars and holidays (or who have done so with that intention or an intention invest but frittered the money away) and all others.

That first class could see trouble with as little as an 0.5% rise depending on serviceability. As can be seen, this may be a faily small segment of the population. Selling the boat will improve serviceability (no marina costs upkeep costs etc even if the original 'investment' is not recovered). Bankruptcy and foreclosure do not appear to be looming for most.

The more I think about it, the more I'm convinced there won't be a blood bath - there could be the occasional opportunity, but it may be in the doodad market rather than the housing market.

 

[Mr Ed]

This came accross my desk

Fairy tale

Today the Reserve Bank said that their “Board decided at its February meeting [held last Tuesday 3 weeks ago] to leave interest rates unchanged, while noting that the likelihood of further monetary tightening being required in the months ahead had increased.” I guess if anyone knew how likely it’s them. But why wait? The median market economist would have applauded it and Parliament was on holidays giving them a critic-free opportunity. (Although “new” opposition leader Kim Beasley would have been given a big free kick at the start of his new term.) However it takes time for higher interest rates to have an impact on the economy. So if the RBA’s estimated probability was in the ‘highly-likely’ category why didn’t they raise rates last week? I reckon it’s because the probability of a rate rise is too small. Instead I continue to expect these kind of warnings of rate rises are like the fairy tale, ‘the boy who cried wolf’. In central banker speak, this is called jawboning. It is designed to quell the remnants of the housing frenzy in the fringe property markets of WA, SA and Tasmania. We haven’t had a rate rise for 14 months because the Australia economy (75% of it anyway: NSW, VIC and likely also Queensland) is too vulnerable to cope with another. The housing boom put all our eggs in one basket and to ratchet rates any higher could bring down the house of cards which the economy has become and likely usher in a recession.



In the RBA statement they came close to connecting the dots which shows just such a picture of an economy that has been all about housing and its associated sectors. They said that the one reason they would contemplate raising rates is “the extent to which the ongoing growth of demand might give rise to capacity constraints and, consequently, upward pressure on wage and price inflation. …The clearest indication of emerging pressures on capacity has been in the disappointing performance of exports…One factor likely to have contributed to this disappointing performance is the strong growth of domestic demand over recent years, which may have adversely affected manufactured and service exports.” Connecting these dots, it says that ‘everybody’ has been so engaged in housing because of the double digit and more capital gains, year in year out, that they can’t be bothered with the paltry returns and greater risk of exporting. The price mechanism is wonderful device but over the past five years it has diverted resources away from exporting and into housing. Today’s statement from the RBA was finalised on 3 February 2005 to incorporate the no-change rate decision announced that morning. It is the material which was presented to the RBA board which decided there was not a case to raise rates. In the following days after that meeting more recent information continued to support that decision with retail sales in absolute decline and private sector building approvals continuing to sink to the lowest level in nearly 4 years (since May 2001). However nice reading they are, fairy tales should not be the basis of economic management.

 

[Medine]

Hi Buzz,

It would be great if Australians, generally, were more educated financially, but I'm not sure that it's true. Sometimet I think you're right, but I still meet lots and lots of people who have no interest or knowledge, and I realise that my perspective is a bit different to the average person . Maybe your RAS is on for fellow investors, too?

Cheers, Medine.

 

[Peter Parker]

Hi Buzz,

It would be great if Australians, generally, were more educated financially, but I'm not sure that it's true.

Two points:

a. Education does not necessarily mean action. For instance we still have smokers, even though the deletarious heath effects are universally known.

b. I am not sure if Australians are less financially-literate than people in other developed countries.

Yesterday I was reading a book on European consumer behaviour that had some stats on debt and savings. Generally the Anglo-saxon countries (including Australia) had lower savings and higher debts relative to income than the Continental European countries. Yet a high proportion of Australians own shares.

However there was hetrogeneity in the European countries - Belgium had the highest savings rate and Switzerland and the Nordic countries had the lowest. I am not sure if European compulsory pension schemes (some of which have higher rates than our super levy) count as tax or savings, but if the latter that could make the European stats look higher.

Moving onto anecdotal stuff, in conversation if I mention to non-IP holding Australians that I am into property investment, they regard this as something that's perfectly normal and a good thing for the future. Some even agree that buying IPs first can work out better than buying a PPOR first, which implies a fairly good knowledge of the tax system, financing and comparative yields.

Yet when I spoke to a German working backpacker in Kalgoorlie last year about the reason for me being there, he thought that buying property for investment was highly unusual and not something that 'people did'. Admittedly a sample of one but it perhaps indicates different attitudes towards individuals buying IPs (or indeed owning even their own home).

So I don't think Australians are necessarily financially less literate than other nationalities. Also compared to European countries with their greater ageing and the structure of their social security systems, I think we'll fare better.

Rgds, Peter

 

[Peter 14.7]

In regards to your comments on Europe you are right. You simply cannot compare.

I remember a German friend with a very wealthy father saying his dad had his 1 home which had been passed down each generation (part of a wall was built by the Romans ) and a new holiday home in a same town in the east. Home had to be built in agreed color, design, look, etc..He had worked as senior exec all his life to get this.

Also in Town Planning studies I learnt in Holland 80% of all homes are in Gov ownerhsip. A hangover from the war. To own any home in Holland means you are mega , mega rich. To rent means you rent form the gov loooong term like a lifetime. Explains why they have great public facilities and town planning design because they control all the land and can do what is right and best long term, not popular and cost effective short term.

And from a visit in Denmark I learnt you are mega rich if you have a car over 2.0 litre in engine due to punative taxes and colleagues estimated 80% of all Mercs in Denmark are ex taxis from Germany.

Only England is like us re Ip and even there they have a very large amount of COuncil Affordable Housing for low income earners and rates are very high like $150 per week and paid by the tenant.

Like comparing Apples with Bratwursts

Peter 147

 

[Pete]

Yes, I've had similar comments speaking with German friends.

They were amazed at the loan flexibility in Australia. From memory, they were very thankful to get a loan at all. They didn't think it was possible to re-value and borrow again to buy an investment.