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Interest rate rises good for property; Why rates rising may push prices up rather than down.
Topic Started: 11 Jan 2017, 10:17 AM (1,867 Views)
silverman47
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Just thought i'd do a quick post i dont check in here that often about interest rates. I see the sentiment on this forum has changed a little bit and some of the would be bears have actually become more neutral about property over the last few months. The pessimists by now are starting to see how silly they have been.

What i would like to point out is that our fastest pace of capital growth over the last 3 cycles or so, have been under periods of rising rates. A family member of mine had a substantial portfolio around the time of the high interest rates around the 80's and was paying at one point 18% on loans. I have had lengthy discussions with him as its somebody who has experienced sharp rises in rates to see what happened with serviceability, rents vacancy and capital appreciation.

What might surprise most of the people on this forum, and probably a few of the investors, is that when rates rose, it was a trailing indicator, that is inflation picked up before the rate rise, capital values increased steadily, wages rose, vacancy fell. All the opposite of what most pessimists on this forum would tell you would likely happen. It was not until right at the end of the rate rise cycle, that this had a detrimental effect on prices, rents, wages and CG. Owner occupiers fared a little worse, but it still was not the end of the world, investors had no problems whatsoever remaining solvent during both the booms, and bust of the property cycle.

I've put a chart up of historical Australian interest rates, and you can see the period from 2000 - 2008 was a great time to be a property owner or investor, which was also consistant rate rises, and it was the GFC in the states, that triggered a mini-recession / recession here. (you could argue this, and say negative growth quarters etc im sure, but the only reason it was not a technical recession is the free money given away - the sitting government cooked the books effectively).

The other thing i will tell you is that when rates rise, loans become more available, and any cash the banks are currently sitting on at the low rates, they are all of a sudden more inclined to lend out. This sees that a whole new range of lenders appear to the market, if you can remember up until 2008 in the late stages of the boom there were quite a vast swath of low-doc products even in australia from alot of new lenders.

So while rates rise - lending becomes more common. With rates this low, lenders are very reluctant to lend the money, only to the very very best of credit worthy borrowers. At the end of the day, rates rising is not a bad thing, it is a GOOD thing. Another factor i would point out is the trump team looks to undertake a series of bank deregulation similar to what the clintons did ultimately leading to the rampant speculation in the property market leading to the GFC. Now we all know how long that actually took to bring about the GFC.

So while Australia is probably a year or a couple of years behind the states, our rate cycles, property cycles, stock market cycles, tend to not be in sync, but they are often close. The low doc loans in australia started appearing here not too long after they were everywhere in the states, i believe we could see a return to that shortly.
US federal reserve
Australian Inflation
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Edited by silverman47, 11 Jan 2017, 10:49 AM.
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Simon_S
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Rising Interest Rates and Record Levels of Debt = higher house prices.......

Interesting theory........
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Chris
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Pete/Shads/khaderbhai

Digging right into the back of the sock draw and the economic degree with this one. Property bills win win win, they can't lose ever
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Rufus
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silverman47
11 Jan 2017, 10:17 AM
The other thing i will tell you is that when rates rise, loans become more available, and any cash the banks are currently sitting on at the low rates, they are all of a sudden more inclined to lend out. This sees that a whole new range of lenders appear to the market, if you can remember up until 2008 in the late stages of the boom there were quite a vast swath of low-doc products even in australia from alot of new lenders.

So while rates rise - lending becomes more common. With rates this low, lenders are very reluctant to lend the money, only to the very very best of credit worthy borrowers. At the end of the day, rates rising is not a bad thing, it is a GOOD thing. Another factor i would point out is the trump team looks to undertake a series of bank deregulation similar to what the clintons did ultimately leading to the rampant speculation in the property market leading to the GFC. Now we all know how long that actually took to bring about the GFC.

Higher margins may incentivise banks to lend more aggressively but they don't "sit" on a pool of funds waiting for rates to rise.
Not sure where you heard that one but you should put it back in the bottom drawer.

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So while Australia is probably a year or a couple of years behind the states, our rate cycles, property cycles, stock market cycles, tend to not be in sync, but they are often close. The low doc loans in australia started appearing here not too long after they were everywhere in the states, i believe we could see a return to that shortly.
US federal reserve
Australian Inflation

Low doc loans never went away here. Not sure what the lending criteria is in the USA but we certainly have them. Note they are low doc loans, not NO doc loans.
One non-conforming lender that I use quite a bit tells me that the default rate on their low-doc loans is better than their full doc loans for the self employed.

These loans are no longer available for consumers as asset lends. I think it will be a long time before they reappear in bank products, if ever but small non-conforming lenders might have a go. I think 60% asset lends are quite low risk.
Take risks - if you win you will become wealthy, if you lose you will become wise
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Simon_S
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Chris
11 Jan 2017, 11:12 AM
Pete/Shads/khaderbhai

Digging right into the back of the sock draw and the economic degree with this one. Property bills win win win, they can't lose ever
If Interest rates were good for Property then lets put them all the way up to 10%.....

Should be even better.....

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silverman47
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Chris
11 Jan 2017, 11:12 AM
Pete/Shads/khaderbhai

Digging right into the back of the sock draw and the economic degree with this one. Property bills win win win, they can't lose ever
Thats not at all what i said in that post. Would you say property prices fell between 2000 - 2008 even 2009 in australia? But i'd have to partially agree and say that most property owners who hold property, and dont ever sell come out as winners, no matter what short term price swings do. The previous two booms confirm everything i've said. I doubt there is a single person in these forums that is an economist. Just a whole lot of bears with no assets besides their skyline and their dirtbike.
Rufus
11 Jan 2017, 11:12 AM
Higher margins may incentivise banks to lend more aggressively but they don't "sit" on a pool of funds waiting for rates to rise.
Not sure where you heard that one but you should put it back in the bottom drawer. ---- I'll correct myself and say cash used to make loans, or creation of new loans is incentivised.



Low doc loans never went away here. Not sure what the lending criteria is in the USA but we certainly have them. Note they are low doc loans, not NO doc loans.
One non-conforming lender that I use quite a bit tells me that the default rate on their low-doc loans is better than their full doc loans for the self employed.

These loans are no longer available for consumers as asset lends. I think it will be a long time before they reappear in bank products, if ever but small non-conforming lenders might have a go. I think 60% asset lends are quite low risk.
The availability and variety of low doc loans in australia since the gfc is miniscule compared to what was on offer right before the gfc.

If you were a bank, would you rather loan at 3% or 6% ? All loans currently being written at these rates, are being qualified for higher interest rates. Banks know the bulk of borrowers can handle higher rates, especially with significantly higher wages.

I agree banks arent lending cash, they use the cash as the basis for creating a loan, but higher rates incentivise lending - to a point.

silverman47
11 Jan 2017, 10:17 AM
Just thought i'd do a quick post i dont check in here that often about interest rates. I see the sentiment on this forum has changed a little bit and some of the would be bears have actually become more neutral about property over the last few months. The pessimists by now are starting to see how silly they have been.

What i would like to point out is that our fastest pace of capital growth over the last 3 cycles or so, have been under periods of rising rates. A family member of mine had a substantial portfolio around the time of the high interest rates around the 80's and was paying at one point 18% on loans. I have had lengthy discussions with him as its somebody who has experienced sharp rises in rates to see what happened with serviceability, rents vacancy and capital appreciation.

What might surprise most of the people on this forum, and probably a few of the investors, is that when rates rose, it was a trailing indicator, that is inflation picked up before the rate rise, capital values increased steadily, wages rose, vacancy fell. All the opposite of what most pessimists on this forum would tell you would likely happen. It was not until right at the end of the rate rise cycle, that this had a detrimental effect on prices, rents, wages and CG. Owner occupiers fared a little worse, but it still was not the end of the world, investors had no problems whatsoever remaining solvent during both the booms, and bust of the property cycle.

I've put a chart up of historical Australian interest rates, and you can see the period from 2000 - 2008 was a great time to be a property owner or investor, which was also consistant rate rises, and it was the GFC in the states, that triggered a mini-recession / recession here. (you could argue this, and say negative growth quarters etc im sure, but the only reason it was not a technical recession is the free money given away - the sitting government cooked the books effectively).

The other thing i will tell you is that when rates rise, loans become more available, and any cash the banks are currently sitting on at the low rates, they are all of a sudden more inclined to lend out. This sees that a whole new range of lenders appear to the market, if you can remember up until 2008 in the late stages of the boom there were quite a vast swath of low-doc products even in australia from alot of new lenders.

So while rates rise - lending becomes more common. With rates this low, lenders are very reluctant to lend the money, only to the very very best of credit worthy borrowers. At the end of the day, rates rising is not a bad thing, it is a GOOD thing. Another factor i would point out is the trump team looks to undertake a series of bank deregulation similar to what the clintons did ultimately leading to the rampant speculation in the property market leading to the GFC. Now we all know how long that actually took to bring about the GFC.

So while Australia is probably a year or a couple of years behind the states, our rate cycles, property cycles, stock market cycles, tend to not be in sync, but they are often close. The low doc loans in australia started appearing here not too long after they were everywhere in the states, i believe we could see a return to that shortly.
US federal reserve
Australian Inflation
Edited by silverman47, 11 Jan 2017, 02:00 PM.
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Trollie
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Simon_S
11 Jan 2017, 11:46 AM
If Interest rates were good for Property then lets put them all the way up to 10%.....

Should be even better.....
Just like turning a dial, it seems like magic to special kids like timo.
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silverman47
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Simon_S
11 Jan 2017, 11:06 AM
Rising Interest Rates and Record Levels of Debt = higher house prices.......

Interesting theory........
For house prices to be greater than the last boom, it stands to reason that so should the debts.
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Simon_S
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silverman47
11 Jan 2017, 01:56 PM
For house prices to be greater than the last boom, it stands to reason that so should the debts.
And Higher Rates will make all that Debt easier to Service.......
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silverman47
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Simon_S
11 Jan 2017, 03:02 PM
And Higher Rates will make all that Debt easier to Service.......
If people are employed, and the banks flood the real estate market and wider economy with cash in new loans, wages, goods and the price of pretty much everything has to rise. Inflation saves the day as it always does.

I was reading another post something like "reasons why the property market will crash in australia" in this forum, its on the main page. The post started in 2011 !!! and its 50 something pages long ! so at what point, are you guys going to say, look maybe ive been wrong about the last 5 - 6 years? You have to cut your losses at some point.
Edited by silverman47, 11 Jan 2017, 05:05 PM.
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