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The debate has never been so fierce when it comes to the definition of the bubble; If you want to end the 'bubble' debate simply ask the question: "So when do you see this bubble bursting?"
Topic Started: 14 Oct 2014, 01:01 PM (502 Views)
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Want to know when the market will change? Keep an eye on interest rates

Robert Simeon, 13 October 2014

I've always liked the saying "can't see the forest for the trees".

It appropriately sums up so much of the distorted self-indoctrinated bias of opinion pertaining to real estate in Australia.

The debate has never been so fierce – especially when it comes to the definition of that 'bubble'. I am of the firm belief that it is those who are actual historians of the Australian property markets who are the ones with the greatest ability to call the exact path and outcomes.

If you want to end the 'bubble' debate simply ask the question: "So when do you see this bubble bursting?"

It's always the fastest way to draw the debate to a fast halt. History has shown when you closely analyse the property market machinations through the Reserve Bank of Australia (RBA) – Cash Rate Target interest rate changes only then can we see the significant market changes.

That being when the RBA increases the cash rate twice (not once) we are starting to see a new course being charted. Then it takes another two to four years for the affects to be seen given that is when households start to come out of their fixed mortgage periods into the higher mortgage agreements.

Given we are the best part of at least 12 months away from the first cash rate increase – which should send the alarm bells ringing – then depending on the next increase we won't start seeing any noticeable market price corrections until 2016 to 2019.

We also need to bear in mind that when the cash rate increases so does the exchange rate as that goes up in unison, which is the last thing the RBA wants to see given it's presently trying to get the exchange rate down.

We should consider that the RBA is well down the track to introducing its new macroprudential tools as well as waiting to receive (then implement) the findings from the Murray Financial System Inquiry.

No doubt the RBA would be very much looking forward to tinkering the markets with these tools so that (for the very first time) other than increasing the cash rate it may just be able to manipulate the markets in a way never seen before. For the first time ever (as many would not be aware) we are witnessing history with these new real estate market initiatives.

Again, history will show whether or not they were effective. However, it will be fascinating to watch the outcomes.

So back to those fools on the hill who following this week's RBA decision to leave the cash rate on hold at 2.50% – they even managed to get that wrong. No it was not a record (as some declared). Even though 14 straight months is getting up there, the actual record is 17, not 16 as some would believe. Furthermore, you can only apply consecutive meetings as the RBA doesn't meet in January.

Having said that, when you go back through the history of the cash rate movements at the RBA we start to see fascinating stories evolve.

I have conducted my research on instances where the cash rate remained on hold for 10 or more consecutive meetings:

The first period of RBA cash rate holds started on 30 July 1993 when the cash rate was moved from 5.25% to 4.75%, where it remained until 27 July 1994 – in total 12 holds. Then on 17 August it was bumped up 1.25% to 5.50%.

The next run of holds, which is the equal record 17 holds, happened on 14 December 1994 when the cash rate increased from 6.50% to 7.50%, where it remained until 3 July 1996.

Then it fell to 7.00%. So we are seeing long holds followed by increases and decreases.

On 30 July 1997 we saw another 16 consecutive holds at 5.00%, to then see it drop to 4.75%.

On 5 June 2002 we saw 16 holds at 4.75%, to then see it increased to 5.25% in November 2003.

On 4 February 2004 we saw thirteen holds at 5.25%. When the cash rate was increased to 5.50% in March 2005, that was followed by another twelve holds that was followed by an increase to 5.75%.

Then on 8 December 2011 we had another ten holds at 4.75%, then saw the rate dropped to 4.25%.

We are now in the current hold pattern after fourteen meetings, so based on history it's anyone's guess what or when the next movement might be. I predict the current rate will be set for the longest period in RBA history as it will go well into the twenty something meetings.

So when you see the arguments mounting that many commentators were disappointed that the RBA hardly mentioned that ''bubble" following this week's decision – history clearly shows that the board members may not be that concerned about that "bubble".

Maybe they are more concerned as to why investors have steered clear of the stock market which, by the way, had a few massive corrections this week – although, wait a minute, nothing much was written about that either.

It all depends on what you are looking at – the forest or the trees?

As to be expected stock levels increased significantly this week – so now we finally get to see firsthand just how strong the markets really are.

Watching these numbers will be telling over the period leading up to Christmas, although I don't believe we will see anything that even resembles that imaginary 'bubble'. Time will tell!

Read more: http://www.propertyobserver.com.au/robert-simeon/36745-want-to-know-when-the-market-will-change-keep-an-eye-on-interest-rates.html
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Not a bad write up.

There's so much definitions of what bubble club factors include... There's some here frothing the mouth adamant that the bubble exists in oz.

So if one buys an asset just because you are expecting the price to rise NEXT YEAR, isn't that the actual scenario of a possible bubble? There's high risk if investors have an unrealistic expectation on quick CG.

Prices fall & construction slows, it affects scores of biznesses, then employment, the tax base..then welfare.

Just realize there's 2 swords.
Lower the IR more, it encourages more people to borrow, & yes increase the household debt.
Increase the IR too much then it will hurt biznesses & households with loans.
Newjerk? can you try harder than dig up another person's blog. My first promo was with Billabong and my name in English is modified with a T, am Perth born but also lived in Sydney to make my $$
It's Absolutely Fabulous if it includes brilliant locations, & high calibre tenants..what more does one want? Understand the power of the two "P"" or be financially challenged
Even better when there is family who are property mad and one is born in some entitlements.....Understand that beautiful women are the exhibitionists we crave attention, whilst hot blooded men are the voyeurs ... A stunning woman can command and takes pleasure in being noticed. Seems not too many understand what it means to hold and own props and get threatened by those who do.
Banks are considered to be law abiding and & rather boring places yeah not true . A bank balance sheet will show capital is dwarfed by their liabilities this means when a portions of loans is falling its problems for the bank.
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