Welcome Guest [Log In] [Register]


Reply
  • Pages:
  • 1
  • 6
A century of Australian interest rates - mortgage rates are not at historic lows or emergency levels
Topic Started: 8 May 2013, 05:41 PM (14,141 Views)
Admin
Member Avatar
Administrator

Quote:
 
The low interest rate environment is a new era for Australian property: Pete Wargent

By Pete Wargent
Friday, 10 May 2013

A new era of lower interest rates

This week’s interest rate decision in Australia was to take the cash rate down to a new record low of just 2.75% and this presents Aussies with similar problems. Bond yields are low and savings accounts are not providing much of a worthwhile return either.

The likely consequence will be a flood of money into bank stocks, which pay handsome franked dividend returns, and capital city investment real estate.

And the rate cuts perhaps aren’t done yet. Westpac’s Bill Evans suggested this week that we may yet see three further cuts down to the previously unthinkable cash rate level of just 2.00%.

Property trends

There has been a long debate in Australia about this structural shift to lower inflation and lower interest rates.

Housing bears have been arguing for well over half a decade now that ‘what goes up, must come down’. That is, house prices in Australia had increased as interest rates fell, and therefore prices must revert to the mean and a lower house price to income ratio.

Steve Keen, who predicted a 40% crash, represented one of the more extreme views. To date, at least, he has been completely wrong as was evident from today’s chart pack release from the Reserve Bank.

What those of us of a more optimistic bent have long suggested, is that a shift to low interest rates would likely lead to greater household leverage and higher nominal prices.

Although the lower rates could actually see repayments fall comparatively low.

This has been occurring as the cost of capital has fallen, and - even before yesterday's rate cut - repayments on new housing loans for a nationwide median-priced home have fallen close to around only a fifth of household disposable income.

RP Data’s index shows that prices have increased in the past 12 months across all major capital cities, most notably in Sydney (+5.25%), Perth (+4.37%) and Melbourne (+3.36%).

A new focus on quality

After the financial crisis, we have now entered a new period of low global interest rates, and it will be a new era too for Australian property. Gone are the high levels of inflation and thus easy gains of yesteryear when the value of debt was inflated away. A focus on a diversified portfolio of shares in quality, profit-making companies and quality city property will be essential.

Asian influences

One of the reasons I have spent so much time in Singapore and Hong Kong over the last few years is to gain a glimpse into Australia’s future. If you think about it, if the populations are to grow as forecast in Sydney (to 7 million), Melbourne (to 10 million), Brisbane (to 4 million) and Perth (to over 3 million) then our cities of the future will look markedly different from those we know today.

Regional prices are dead flat

For a long time, some promoters of property have been talking up regional centres and remote-location property, but as the RBA’s chart pack release above clearly shows, most regional property growth occurred long ago during the great increase of household leverage through to around half a decade ago.

There has been no growth at all for years now – prices are absolutely dead flat – a trend I expect to continue with relatively high nominal prices already in existence.

To some extent, Australian property owners have gotten off lightly. In regional markets across Britain prices have been slammed by more than a quarter of their value over. Those who more sensibly stuck to the populous south-east in and around London have seen a surge of foreign capital drive prices on to all-time highs.

This, I believe, is part of the new normal in real estate. Global investors looking for a safe haven for their money head to key capital city markets and drive prices up.

Much of the growth experienced in the last 12 months in Australia has been from a surge in new investors rather than from homebuyers.

Foreign investment capital

There has been much talk in recent times of a proliferation of Asian buyers bringing ‘hot money’ to Australia.

Foreign investment rules dictate that non-residents are permitted to buy residential property which is under construction (i.e. 'off the plan') or for re-development, or to purchase new dwellings which have not yet been sold.

Other purchases may require Foreign Investment Review Board (FIRB) approval and the FIRB states that "foreign investors cannot buy established dwellings as investment properties or as homes" save for certain exceptions, but there are question marks as to whether these rules are enforced robustly (or even at all).

For such cashed-up buyers, the rumour mill suggests that attractive yields and to some extent even purchase price appear of little relevance as well-located investment properties are sought at almost any cost. This accords with what has been seen in London where residential property yields are generally poor yet foreign investors continue to drive prices higher.

Reliable statistics on whether foreign (i.e. non-resident) buyers are actually purchasing existing dwellings in Australia are by definition not available, but if you keep your ear to the ground and ask estate agents and buyers' advocates: “is it happening?” I suspect that the nudge might well be "yes, to some extent".

Just as foreign investors in Britain only appear interested in London, it’s likely that equivalent investment here will be focussed on the major capitals. It’s one of the many reasons I’ve always argued that quality inner suburbs in those cities represent a far lower risk than regional or outer suburbs. When the next downturn comes, a relaxation of foreign investment rules may support key city prices, but those in the regions, where few investors venture, may suffer.

Pete Wargent holds a range of finance and property qualifications and is the author of Get a Financial Grip – a simple plan for financial freedom.

Read more: http://www.propertyobserver.com.au/trends/the-low-interest-rate-environment-is-a-new-era-for-australian-property-pete-wargent/2013050961213
Follow OzPropertyForum on Twitter | Like APF on Facebook | Circle APF on Google+
Profile "REPLY WITH QUOTE" Go to top
 
Troll
Member Avatar

zaph
9 May 2013, 07:52 AM
I think the RBA has not always targeted inflation and was not always independent of government. If so when did the RBA gain independence and when did it start targeting inflation?
There’s inflation and then there’s inflation.

In this case we face higher prices from a falling dollar as a manifestation of a fall in living standards. Something most economists say Australians have to accept. As such inflation will have to stay above 3% for quite sometime for the RBA to act – beyond a tick or two up – if we get down to 2%-2.25%. At 2.75% or 2.5% they might just hold for up to a year.
House prices are what they will watch. If they breakout out of stasis and rise more than a few percent maybe the RBA will raise rates a tick or two to send a signal that cheap money won’t last forever. But the RBA among many thinsg wants the boomers to start selling and downsizing and freeing up their capital to in part flow down the generations and start getting more ownership among GenY etc. Keep in mind that in many European cities the parents buy their an apartment kids when they get married – so this is not a unique social economic outcome.

Until the US brings QE3 to a halt – rates will stay low in Australia and work to take the heat out of the dollar. Eventually the impact of the lower dollar will flow through to high company profits and higher tax receipts. Which might eventually flow through to wages if inflation is decidedly higher. But if everything stays pretty much flat and just ticks over with a slow return to a better budget position then the status quo could be with us for 18 months or longer. A lower dollar should also keep employment steady or at least avoid a serious collapse.

The RBA and Treasury finally appear to understand that there is another economy outside the mining sector and the gravy train is over. Until we pass the peak of the mining investment boom and start to see what it looks like on the other side – the RBA is going to remain very nervous. These guys want to keep their jobs after Sept 14. They all saw what happened in Japan. The idea that the RBA is independent is a complete illusion created by politicians to give them cover for taking the hard decisions. But when it ain’t working at a macro level – the government has to step in and reboot the process.

In the meantime, everyone should take a long cold shower about real estate – it’s going to stay subdued for a long time. No matter how cheap you make money to borrow – prices are still very high in relation to wages and as much as people like to call other people stupid – most people are quite aware that over borrowing at >5% is just asking for trouble down the track. Human beings might do plenty of dumb things but we didn’t build a global civilization because we are entirely stupid. On balance “the crowd” aka “the mob” is a lot smarter than often given credit for.

As to the stock market – does the RBA really care if you lose your money gambling against professional managed funds and high speed traders. The honest commentators like Marcus Padley warn people about the stock market everyday. And unlike housing there’s an almost limitless supply of bridges to sell stock in.

The logjam in the housing market the past couple of years was very much among the older generations who were holding off selling.

With prices up a tick and a general feeling that this is “a good time to sell” you have seen movement across the quality housing markets. How long it lasts is another question. And there were plenty of signs that after a good post Xmas sales period the market was running out of steam. Which is one of the reasons they have cut rates again. I realise that a lot of this is just can kicking – but the alternative is not that pretty.
Profile "REPLY WITH QUOTE" Go to top
 
Veritas
Default APF Avatar


Dr Watson
10 May 2013, 09:26 AM
I was not talking about 2003 to 2007, you moron. I said the PREVIOUS hiking cycle. That was in 2010. The LAST time the RBA raised rates, dwelling prices and clearance rates fell in response. The same thing will happen next time. We have in recent years reached a point where interest rates are the prime mover because of affordability constraints. Yes, I know going back over history you can show that rates and dwelling prices could rise at the same time. It's my belief that those days are behind us. A lot of would-be FHB can only enter the market now if rates keep making new lows.
Thats the period i thought you were talking about alright.

And you are right, house prices rose immediately after the GFC with the cheap money and the FHOB, and feel in line with the rate rising cycle that folllowed.

The punchbowl has now been returned though. HUZZAH!
Quote:
 
In the meantime, everyone should take a long cold shower about real estate – it’s going to stay subdued for a long time. No matter how cheap you make money to borrow – prices are still very high in relation to wages and as much as people like to call other people stupid – most people are quite aware that over borrowing at >5% is just asking for trouble down the track. Human beings might do plenty of dumb things but we didn’t build a global civilization because we are entirely stupid. On balance “the crowd” aka “the mob” is a lot smarter than often given credit for.


Big mistake pal. Just wait until Shadow and Strindberg get their claws into you for uttering such heresy.

All that other stuff that applied to the rest of the developed world (crazy credit relaxation, specualtive frenzies, the lush animal spirits following property fortunes) that just didnt happen here you see?

Our housing boom was a different, purer boom, the product of ladies leaving the home and entering the workforce and a strong economy. Nothing to see here.

You'll learn.

Edited by Veritas, 10 May 2013, 01:37 PM.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
Profile "REPLY WITH QUOTE" Go to top
 
Dr Watson
Member Avatar


Troll
10 May 2013, 01:02 PM
And there were plenty of signs that after a good post Xmas sales period the market was running out of steam. Which is one of the reasons they have cut rates again.
I'm with you. It can't be proven, but in the absence of a seriously low CPI reading, it felt like they were targeting something else on Tuesday. The fall in dwelling prices in the month of April and a rate cut in May might be coincidental. Or maybe it isn't. If Stevens is now targeting house prices, his logic is not entirely flawed — after all, the Australian economy is housing-centric. Higher house prices should lead to higher borrowing and consumption. But for as long as interest rates can only fall to ZIRP, and no further, he needs a more sustainable strategy for long-term economic growth.
Edited by Dr Watson, 10 May 2013, 02:03 PM.
The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt — Bertrand Russell
Profile "REPLY WITH QUOTE" Go to top
 
Trojan
Default APF Avatar


Dr Watson
10 May 2013, 09:26 AM
I was not talking about 2003 to 2007, you moron. I said the PREVIOUS hiking cycle. That was in 2010. The LAST time the RBA raised rates, dwelling prices and clearance rates fell in response. The same thing will happen next time.
So your theory works for 2010 rate hikes but not the 2003-2007 rate hikes yet you still assume it will follow your theory next time the RBA raises rates?
I have my doubts ....
I put trolls and time wasters on my ignore list so if I don't respond to you, you are probably on it ....
Profile "REPLY WITH QUOTE" Go to top
 
genX
Default APF Avatar


Sydneyite
9 May 2013, 11:09 PM
Right - so after 5 years or constantly RISING interest rates and house prices (2003 - early 2008) - especially in parts of Australia other than Sydney (which peaked earlier, and was more impacted by the dot com crash etc), prices finally fell less than 2%, as interest rates peaked at a level 250% of the current setting..... and we are supposed to buy the argument that as soon as interest rates rise again from here property will suddenly collapse?? Highly unlikely based on recent historical context is all I am saying, as you have just shown..... :dry:
Oh, I thought you just meant 2008 when you used the term '5 years ago', I didn't realise you meant 2003-2008.

Well, since you brought it up, from December 1997 to December 2002, the Sydney house price index climbed from 125.0 to 230.2, a rise of 84% or an equivalent annual return of almost 11% (10.713). Then the subsequent period to December 2008 with "5 years or(sic) constantly RISING interest rates", the (rebaselined) index climbed from 88.5 to 98.9, a rise of 11%, or an equivalent annual return of just under 2% (1.869). [1]

So it would appear that in the last tightening cycle, house prices appreciated at less than inflation rate, whereas in the easing cycle that preceded it, they beat inflation by a factor of 3. It is your contention that rising interest rates had no effect on house prices, correct?

http://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/0/B3F41D7EB3125271CA2568BA002E456D/$File/64160_Sep%201999.pdf
http://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/0/BE4CB9C56F7F4E35CA256CE000826C80/$File/64160_dec%202002.pdf
http://www.abs.gov.au/ausstats/abs@.nsf/ProductsbyReleaseDate/1CE07D8F225315D9CA25782900114B70?OpenDocument

[1] Even to me that seems low. Maybe the ABS publishes bullshit, I don't know.



Edited by genX, 11 May 2013, 09:53 AM.
Profile "REPLY WITH QUOTE" Go to top
 
Admin
Member Avatar
Administrator

Quote:
 
It's really not back to the 1960s for borrowers despite a 2.75% cash rate

By Larry Schlesinger
Tuesday, 14 May 2013

The cash rate may be back to what it was in January 1960, but it was a different era for those seeking a home loan.

For those who missed it, the RBA’s decision to cut the cash rate to 2.75% last week meant that the benchmark borrowing rate fell to a 53-year-low below a 'cash rate' setting of 2.89% in January 1960.

This was not the official benchmark figure it is today, since the Reserve Bank did not publish a cash rate target until January 1990.

Rather the cash rate was a proxy measure of short-term interest rates at a time when the banking sector was highly regulated and getting a home loan meant making an appointment with your bank manager and wearing your best suit to an interview.

Posted Image

There were no foreign banks, no discount online mortgage offerings, nor the plethora of different mortgage products tailored for different types of borrowers and investors.

There were no honeymoon rates, low-doc loans, reverse mortgages, packaged home loans or off-set accounts with such product innovation only coming to the fore in the late 1990s and early 2000s.

Getting a good home loan rate meant having a good relationship with your bank manager.

The headline home loan rate was also lower at 5.00% through 1959 and 1960, according to CommSec chief economist Craig James compared with an average standard variable rate of around 6.17%, according to RateCity.com.au following the 25 basis point reduction.

However, a standard variable rate would not even have been quoted in 1960s, with most home loans on fixed-rates with "flexible" mortgage rates only appearing more commonly in the mid-1960s. Certainly most of the Commonwealth Bank's lending would have been done on fixed-rates.

Assistant RBA governor Guy Debelle pointed out in a speech in 2010 the differences between mortgage lending today and forty and fifty years ago.

"In the 1960s and early 1970s, the Australian financial system was heavily regulated," Debelle said.

He highlighted a number of wide-ranging controls including that interest rates that banks could charge on their loans and pay on their deposits were controlled.

"Banks were subject to reserve ratios and liquidity ratios. There were directives on the overall quantity of loans banks should make, as well as moral suasion on who they should lend to.

"Institutions were specialised – trading banks lent to businesses, savings banks held large quantities of government debt and lent to households (almost entirely for housing), and finance companies lent for more risky property loans and consumer credit," he explained.

Finance companies likes of the Finance Corporation of Australia funded Alan Bond's first property speculations now subsumed into ANZ-owned Esanda.

However, this heavy regulation of the banks would later result in them losing market share as the unregulated financial sector, primarily building societies moved in.

The banks’ share of total financial intermediary assets declined from nearly 90% in the early 1950s to 70% in 1970.

"The banks’ share of housing credit was just below 60% in 1976 with much of the rest of the mortgage market being provided by credit unions and building societies. Finance companies, which were generally associated with the banks, often provided top-up funding to bank mortgages but were not a particularly large share of the overall market," explained Debelle.

Compare this with today's mortgage market where banks have 96% of outstanding home loans and credit unions and building societies just 4%.

And there are other differences.

It certainly was not possible as it is today to contact your mortgage broker if you felt you were paying too high an interest rate and ask them to source a better deal with another lender.

Or demand that your bank offer you a better rate.

In 1959/60 Australia's GDP growth was 4.4% compared with 3.1% through 2013.

The unemployment rate was under 2% compare with the current 5.5%, meaning decidely fewer borrowers were worrying about paying off their mortgages.

It certainly was not the market-driven banking and lending system we have today while a high Australian dollar - a key factor in the RBA's decision to cut the cash rate on Tuesday - was not a problem as the currency only floated in 1983.

The floating of the dollar coincided with federal treasurer Paul Keating deregulating the banking system between 1983 and 1985 granting 40 new foreign exchange licences in June 1984; and granting 16 banking licences to 16 foreign banks in February 1985.

Australia’s sixth biggest mortgage lender, ING Direct, only began offering its cheap online home loans and high-interest savings accounts in 1999.

Bear in mind that in 1960, the Reserve Bank of Australia had only just come into official being in under the Reserve Bank Act 1959, tasked with undertaking the central banking functions of the Commonwealth Bank.

The Commonwealth Bank as we know it today, originated from this date offering commercial banking and savings banking activities in the form of the newly created Commonwealth Banking Corporation.

Monetary policy was of course entirely different with no RBA imperative to maintain an inflation target of between 2% and 3%.

And it’s not just the nature of the banking system that was so different, house prices had yet to boom as they did in the 1990s and 2000s.

Housing was far more affordable meaning mothers did not have to go out into the workforce to help pay for the mortgage and buying your first home was not the financial commitment it is today.

The boom in property values prior to the GFC saw house price to income ratios of less than to two in the 1960s rise to above four to one currently.

As for household debt that's in a different stratosphere.

In 1960 household debt to Australia’s GDP was less than 20%.

Today it’s just under 150%.

Read more: http://www.propertyobserver.com.au/mortgages/it-s-really-not-back-to-the-1960s-for-borrowers-despite-a-275-cash-rate/Page-1
Follow OzPropertyForum on Twitter | Like APF on Facebook | Circle APF on Google+
Profile "REPLY WITH QUOTE" Go to top
 
Guest
Unregistered

apex
8 May 2013, 05:54 PM
Shadow
8 May 2013, 05:41 PM
In fact interest rates are now at levels that would have been considered normal for most of the past century.

If past history is a guide, rates could remain close to current levels for a long time.
Are you expecting several world wars and great depressions like last time interest rates stayed low for a long time?
Well are you Shadow? Because that's what happened back then, and property then went into the toilet for 30 years
"REPLY WITH QUOTE" Go to top
 
Shadow
Member Avatar
Evil Mouzealot Specufestor

Shadow
8 May 2013, 05:41 PM
Data going right back to 1852 shows that prior to 1970 mortgage interest rates were typically around 5% - i.e. at current levels.

Posted Image


Here's another chart showing current 'real' mortgage rates (inflation adjusted) compared to the 1970s...

Posted Image
Edited by Shadow, 7 Aug 2013, 12:49 PM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
Profile "REPLY WITH QUOTE" Go to top
 
Van The Man
Unregistered

Shadow
7 Aug 2013, 12:49 PM
Here's another chart showing current 'real' mortgage rates (inflation adjusted) compared to the 1970s...

Posted Image
So what you are saying Shadow is real (inflation adjusted) mortgage rates in August 2013 are the lowest since 2008 and the early-2000s, but still above levels seen in the 70s? The 1970s were a nice time to buy a home. They were much cheaper (3x incomes) and buyers had their debts inflated away via high inflation and wage increases!
"REPLY WITH QUOTE" Go to top
 
1 user reading this topic (1 Guest and 0 Anonymous)
Go to Next Page
« Previous Topic · Australian Property Forum · Next Topic »
Reply
  • Pages:
  • 1
  • 6



Australian Property Forum is an economics and finance forum dedicated to discussion of Australian and global real estate markets and macroeconomics, including house prices, housing affordability, and the likelihood of a property crash. Is there an Australian housing bubble? Will house prices crash, boom or stagnate? Is the Australian property market a pyramid scheme or Ponzi scheme? Can house prices really rise forever? These are the questions we address on Australian Property Forum, the premier real estate site for property bears, bulls, investors, and speculators. Members may also discuss matters related to finance, modern monetary theory (MMT), debt deflation, cryptocurrencies like Bitcoin Ethereum and Ripple, property investing, landlords, tenants, debt consolidation, reverse home equity loans, the housing shortage, negative gearing, capital gains tax, land tax and macro prudential regulation.

Forum Rules: The main forum may be used to discuss property, politics, economics and finance, precious metals, crypto currency, debt management, generational divides, climate change, sustainability, alternative energy, environmental topics, human rights or social justice issues, and other topics on a case by case basis. Topics unsuitable for the main forum may be discussed in the lounge. You agree you won't use this forum to post material that is illegal, private, defamatory, pornographic, excessively abusive or profane, threatening, or invasive of another forum member's privacy. Don't post NSFW content. Racist or ethnic slurs and homophobic comments aren't tolerated. Accusing forum members of serious crimes is not permitted. Accusations, attacks, abuse or threats, litigious or otherwise, directed against the forum or forum administrators aren't tolerated and will result in immediate suspension of your account for a number of days depending on the severity of the attack. No spamming or advertising in the main forum. Spamming includes repeating the same message over and over again within a short period of time. Don't post ALL CAPS thread titles. The Advertising and Promotion Subforum may be used to promote your Australian property related business or service. Active members of the forum who contribute regularly to main forum discussions may also include a link to their product or service in their signature block. Members are limited to one actively posting account each. A secondary account may be used solely for the purpose of maintaining a blog as long as that account no longer posts in threads. Any member who believes another member has violated these rules may report the offending post using the report button.

Australian Property Forum complies with ASIC Regulatory Guide 162 regarding Internet Discussion Sites. Australian Property Forum is not a provider of financial advice. Australian Property Forum does not in any way endorse the views and opinions of its members, nor does it vouch for for the accuracy or authenticity of their posts. It is not permitted for any Australian Property Forum member to post in the role of a licensed financial advisor or to post as the representative of a financial advisor. It is not permitted for Australian Property Forum members to ask for or offer specific buy, sell or hold recommendations on particular stocks, as a response to a request of this nature may be considered the provision of financial advice.

Views expressed on this forum are not representative of the forum owners. The forum owners are not liable or responsible for comments posted. Information posted does not constitute financial or legal advice. The forum owners accept no liability for information posted, nor for consequences of actions taken on the basis of that information. By visiting or using this forum, members and guests agree to be bound by the Zetaboards Terms of Use.

This site may contain copyright material (i.e. attributed snippets from online news reports), the use of which has not always been specifically authorized by the copyright owner. Such content is posted to advance understanding of environmental, political, human rights, economic, democratic, scientific, and social justice issues. This constitutes 'fair use' of such copyright material as provided for in section 107 of US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed for research and educational purposes only. If you wish to use this material for purposes that go beyond 'fair use', you must obtain permission from the copyright owner. Such material is credited to the true owner or licensee. We will remove from the forum any such material upon the request of the owners of the copyright of said material, as we claim no credit for such material.

For more information go to Limitations on Exclusive Rights: Fair Use

Privacy Policy: Australian Property Forum uses third party advertising companies to serve ads when you visit our site. These third party advertising companies may collect and use information about your visits to Australian Property Forum as well as other web sites in order to provide advertisements about goods and services of interest to you. If you would like more information about this practice and to know your choices about not having this information used by these companies, click here: Google Advertising Privacy FAQ

Australian Property Forum is hosted by Zetaboards. Please refer also to the Zetaboards Privacy Policy