Whats Happening in Finance and Property Investment

Great Interest Rates at the moment

John Smith - Thursday, November 20, 2014

The banks are really fighting each other for your business at the moment.

Rates on offer are very low, however it does depend on the bank you are going to.

Some are offering extremely low fixed rates but their variable rates are higher, and some their variable rates are low, but fixed rates are high.

Make sure you crunch the numbers and review your objectives before choosing or ask a broker to do it for you.

Up, Down, and all around for Interest Rates - what is happening!

John Smith - Thursday, November 20, 2014

Lots and lots of talk in the media about where people see interest rates heading. No wonder everyone is confused.

Also some weird calls from economists, like one that said interest rates would rise next year and then fall again after that.

Funny how the futures market shows exactly the opposite for the next 18 months.

I will try not to be cynical, when I see it is someone associated with  providing home loans and their fixed rates are higher than their variable rate.

As I was saying the Futures implied yield curve for the next 18 months shows a slight downward curve until August 2015, however it is about 0.07% so I  doubt the RBA will drop rates by the normal 25 basis points or 0.25% unless something else triggers it.The market knows the RBA don't want to overheat the property market any more than it is, and raising interest rates will kill off any economic recovery.

Then the curve rises again up to April 2016, but only by about 0.095%, so in essence where we are now.

In other words for the next 18 months 'The Market' does not see any change to official rates, so I have to wonder where these so called economists are getting their information, especially as this is the data that the banks use to hedge themselves for any movements.

I also suggest the rise at the end of the curve is more about risk, than expectation. You see the further we go into the future the more risk there is that the curve is wrong, and so you have to pay more for your hedge.

Whats happening in the economy Aug 2014

John Smith - Wednesday, August 20, 2014

Its been an interesting few weeks with unemployment hitting 6.4% and the Australian Misery Index sitting at 9 (The unemployment figure added to inflation rates) the highest it has been since the GFC.

If you talk to people everyone seems gloomy about the economy at large, as the bush telegraph takes its toll. Lets face it, with the speed of communication and the likes of facebook and twitter, we are in constant communication with people all of the time, so we are bombarded by gloomy messages especially from the media, who make their living from telling you bad things.

BUT should we all really be that gloomy?

It looks like Interest rates won't be increasing anytime soon, with the market expecting them to stay level for the next 18 months, and the RBA saying that they are comfortable with the current rates. Why are they comfortable? Because they are treading a fine line right at the moment. The RBA won't want to kill off economic growth by increasing interest rates, and won't want to overheat the market by decreasing interest rates. They like the rates where they are right now!

The stock market is up about 4.3% since the beginning of the year, up 9.2% over the last 12 months, and up 25% over the last 5 years.

Australian property prices in capital cities from June 2013 to June 2014 show growth -

  • Sydney 15.6%
  • Melbourne 9.3%
  • Brisbane 6.8%
  • Adelaide 5.6%
  • Perth 3.6%
  • Hobart 4.3%
  • Darwin 3.4%
  • Canberra 2.2%

Its true that rental vacancies have risen in all capital cities except Hobart, but are still at about normal vacancies rates of 2.3% (Hobart at 1.6%)

If you are out of work, you may not be happy, or if you took part time work as that is all you could find, then you may find costs a little too high, but at the end of the day even if you inflated the unemployment figures by a further 13.6% to cover those that have given up or doing part time work, that still means 80% of people are still employed.

Long periods of time in a low interest rate environment have always led to booms, and I don't think this will be any different. Make sure you don't let the doomsayers hold you back.

To Fix or Not to Fix, that is the question!

John Smith - Wednesday, March 19, 2014

A couple of weeks ago, we had a couple of banks namely Westpac and Macquarie forecasting that we may see another round of interest rate falls this year. That was against the majority of economist's forecasting we may see rises soon.

Both Westpac and Macquarie in the last couple of days have back flipped on that, and said they now no longer see rate falls this year at all, although they see rates staying the same for a little while before rising.

Another economist says the massive interest cuts we had over the last two years buffered our economy from falling terms of trade and a decrease in mining investment, with interest rate sectors like the housing market and share market doing well out of that, with a flow on effect to employment. However they feel that by mid year, it will wear off, and there will be cries for more cuts.

Another, warns of a 4% increase soon, based on the wording of the Reserve Bank (RBA) Governor, Glenn Stevens. For servicing purposes, banks and lenders look at whether prospective borrowers can stand an extra two per cent rise in rates before lending to them. Glenn thinks banks and other lenders should put in a three to four per cent extra test, which means, he is thinking that the current rates are very low — historically low — and if normalcy returns over the next three to four years, then rates could easily start moving back up to approximately seven per cent, and from there to eight or nine per cent if inflation starts to get to high for the RBA.

So with all those mixed signals how can the normal man in the street decide.

If you talk to a mortgage broker, many don't like fixed interest products, myself included! Having working in the stock markets for many years, and been close to the capital markets I normally tell my clients this -

a) Banks rarely lose when it comes to fixed rates. I should point out, that its not banks, but normally investors on the other side, with the bank being a middle man. Normally those investors are large institutions, who pay a lot of money to very smart people to make sure they don't lose out.

b) Deciding to go for a fixed rate should not be about trying to beat the bank, but being comfortable about the repayments you are going to make on that fixed rate. In other words you like the idea of no surprises.

c) If variable rates rise, a fixed rate may cushion you from the increase, but at the end of the fixed rate period, a large adjustment to living expenses may need to be made, whereas people on variable rates would have made many adjustments during the increases to cater for increased loan repayments and already be comfortable with the new rates they are now paying.

So - to fix or not to fix????

I have changed my stance on this somewhat. The reasoning behind my change is based on current fixed rates. My own belief is, we will not see too much change over the next 3 years, something even our Reserve Bank is saying.

1 Year Rates starting at 4.49%
2 Year Rates starting at 4.74%
3 Year Rates starting at 4.87%

And variable rates starting at 4.73%
* Rates are indicative only, and other fees may be involved.

You can see that if the market thinks there is very little risk of rates falling, and more risk of rates rising, therefore taking a punt on one of the above rates will not cost you too much, even if the rate should fall a little lower, say 0.25%, yet you will have protection for up to 3 years.

I am still not a big believer in fixed rates, but if there was a time to look at them, it would be now when rates are historically low.