Interest Rate Prediction

($1,000,000 @ 4.50% IO) = $45,000 pa = $3750/m
($1,000,000 @ 7% P&I 25 yrs) = $84,804 pa = $7067 / m

Would need to increase typical IO repayments by 88% to get to same P&I repayments at floor rate.

 

If looking at P&I actual versus P&I floor rates then
$1,000,000 @ 4.00% P&I 25 yrs = $5278 /m
$1,000,000 @ 7.00% P&I 25 yr = $7067 / m

So would be about 34% uplift on actuals.

 

Hearing more from APRA/RBA and the dataset they have (FBS report Oct 18), they clearly believe it isn't restrictive borrowing power that's driving market conditions. They seem to have deep dive analysis suggesting most borrowers don't go anywhere near their borrowing power. That is, reducing assessment rates won't actually change anything in ~90% of loan assessments. Albeit this analysis is pretty rough and likely not very accurate. I don't quite think its that high, but I do agree with the general sentiment that on a macro level borrowers shouldn't really be borrowing as much as they can.

The above commentary would likely suggest there'll be no changes to the assessment rate. I.e. it won't solve a problem that they consider real.

A better way to solve this funding issue would be to shift risk to non-bank space and provide/promote more competition here over time. The market is doing this anyway.

 

Seems their deep dive wasn't very deep, after all... perhaps it was the Governor jawboning in an attempt to deflect criticism from the RBA and APRA being asleep at the wheel between 2012 and 2015, the period following massive cash rate reductions, where "actuals" were allowed to stay in play , resulting in a gigantic surge in borrowing capacity and IO volumes , which in turn led to prices going ballistic in Australia's two largest markets SYD and MEL?

After all, the evidence is mounting monthly that their policies have created this mess.... and the consequnces of the mess are now being felt beyond property prices. cars sales, retail spending - all down down down. They must be genuinely concerned down at the Martin Place, and with little or no policy ammunition at their disposal to counter the month in month out negative data, should we really be surprised the Governor is looking to blame other events, rather than saying "we botched it" ?

Whatever the reasons, the SMH reports this morning that the RBA's own economists have concluded that credit conditions pre APRA were responsible for driving prices - which is exactly as I have argued... and the report also concludes that credit conditions post APRA have been equally responsible for price corrections since... also as I have argued - so whatever arguments our RBA Governor was making last week now seem a little watery at best, following this revelation.

"They found that a one percentage point cut in interest rates lifted house prices by 8 per cent in the two years after the move" Without being facetious - derr, hello! This is the "actual" effect - where rate cuts in the pre APRA era equated directly to increased borrowing power, which equated directly to increased prices being paid . Interestingly, as I have also argued, the report says that it takes about 2 years for the effects to be felt.... just as it took about 2 years for the reverse effects to be felt. APRA obviously introduced APG223 in Dec 2014, requiring banks to use 7% P&I assessment rates , and banks started adjusting policies in July 2015 to reflect that.... and it was about 2 years later ( mid 2017) when the bite started being felt . Is the 2 year delay a coincidence? I think not .

Arguments about macro this and micro that, and borrowers not being anywhere near their theoretical maximums are all lovely and all .... but for me at least, they are white noise. It's really very simple. Borrowers used to be able to borrow 12-15 x income ( lets call that X ) Now they can only borrow 6-7 x income ( lets call that Y) We know that borrowers didn't take up all of that 12-15 x borrowing potential, because medians peaked at @ 10.4x income in SYD and @ 9.5x income in MEL, but its irrelevant because whether they borrowed 70%-80% of their potential maximums or whether they borrowed 100% of their potential maximums, both figures were well above the 6-7 x income available now . Simply put, Y isn't enough to support X prices. Result = correction

Sure, some buyers who could buy now are waiting on the sidelines, but the fundamental reality of Y ( post APRA) not being enough to support X( pre APA) hasn't changed .

And that's why debt reduction or significant wage rises or a reduction to the assessment rates are needed before either city can expect growth to return .... and only one of those three looks like something people can realistically control ; debt reduction.

https://www.smh.com.au/politics/fed...ated-the-property-market-20190311-p513ak.html

 

What a revelation. I'm glad the RBA cleared some of this up. Next thing the RBA will be "discovering" a link between low interest rates and overvalued equity markets.

As a side note, Peter Tulip (co-author of the RBA paper in question) wrote a paper in 2007 that extolled the stability and soundness of the Icelandic banking system. He somewhat missed the mark on that one...

 

or heavy rainfall and flooding ....

or a diet of KFC 3 x daily and obesity ...

I guess what I was trying to illustrate was that the causes have always been obvious,but with several threads starting to talk up SYD and MEL recoveries, and using arguments such as "people can borrow more than they are borrowing- they arent even nearly maxed out" and other such comments by the RBA Governor over recent weeks to justify their positions.... well, BS has been called.

 

Yeah, maybe the RBA could do a ring-around to all the households out there that aren't currently utilising their full borrowing capacity? Encourage them to do their patriotic duty and take out a new homeloan to keep the economy buoyant.

 

Ive said many times - it’s a decade to deleverage . The era of big growth is over for the time being . So if you are buying resi property , make sure it’s able to pay for itself ( or very close to it) under P&I conditions

Otherwise be prepared to pump 8,9,10k or more of non tax deductible payments into a property to manage the P&I

One day the credit environment may reward speculation again - that’s not today though , or any day soon ....

Pay down debt

 

There will be no more rate cut for the borrower, the bank and the ADI must take some profit.
Hence the RBA decision to cut it even to 0% might not be passed down, but if it is raising the interest rate, all of those institutions will definitely raise it up.

 

Alan Oster (NAB Chief Economist) said at NAB’s budget breakfast the other day that he thinks banks should pass on the majority of rate cuts to help rebuild trust. We’ll see what happens.

 

The interesting thing I'm seeing is that some lenders have bumped up variable rates in a low key fashion - suspect that's in the general prediction that RBA will potentially drop another 0.25 or 0.5% cash rate towards end of this year. As RBA announce the cash rate drop then lenders will have to follow to a degree (unless they want to cop a beating from media big time), in which case they can still maintain their profit margin as it'll just revert to what they're charging right now. And if RBA doesn't move, then they can pocket a bit more profit...so it's a win-win for them.

While variable rate is creeping up a little the mid term fixed rates are trending down. We're seeing lenders giving better discounts on the 3 year fixed rate. I use lender fixed rates to gauge how the lender predicts mid term rate trend will be heading towards. So I think in this case they're betting on mid term rate to go lower, which means the current low rate environment is here to stay at least for another 2 to 3 years.

Cheers,
David

 

Seems as if i was on the money and assessment rates may be on the way down. Makes a lot of sense!

APRA looks to amend mortgage lending guidance - Mortgage Business

 

Any perdiction of rate cuts in May bringing to "zero" and make history?

On RBA site - the indication in reports is that the IR will stay low for many years but nothing about if they waill drop on 5th May!!

 

Given that we are doing better than expected at this stage, I think there won't be a cut in May.

 

Yeah for the first time in several years inflation for the most recent quarter is within the target band - I guess the RBA can pat themselves on the back and hold course!