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Rating downgrade.

Discussion in 'Property Market Economics' started by Small_investor, 7th Jul, 2016.

  1. Small_investor

    Small_investor Active Member

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    Hi guys, what are your views on the possible rating downgrade in Australia's AAA rating. Will it lead to higher interest rates??
     
  2. Kangabanga

    Kangabanga Well-Known Member

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    IIRC rating downgrade will not increase the interest rate set by RBA, in fact it could lead to a further fall in rates if the downgrade slows down the economy.

    It will however increase the cost of funding for the government as the interest rate on government bonds would increase to reflect the increased risk of a downgraded nation.

    A good example is UK post Brexit, their AAA was cut two notches down and the Bank of England is now looking to cut interest rates and do quantitative easing.
     
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  3. Small_investor

    Small_investor Active Member

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    You may be right but lot of stuff in the news says otherwise.
    Losing Australia's AAA rating could push up home loans
     
  4. Bayview

    Bayview Well-Known Member

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    Instead of $1b p/m approx interest (that's $1b per month) we (the Gubb) currently pay on the deficit borrowings, it will be higher for future borrowings; if the downgrade occurs.

    This means; less schools, hospitals, roads, general infrastructure; unless the Gubb can miraculously inspire enormous investment into job growth somehow...don't hold your breath.
     
  5. C-mac

    C-mac Well-Known Member

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    Yikes! Can't believe Australia pays $1b in interest! Who do we source the bulk of our loans from?
     
  6. Ted Varrick

    Ted Varrick Well-Known Member

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    Um, anywhere? 1 billion. That's a lot.

    Just kidding, lucky we have a bunch of equity in UK Property Funds and Italian bank stocks.
     
  7. sash

    sash Well-Known Member

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    No quite the contrary...I think rates will drop...Brexit has surprised a few people......I can see an interest rate cut in Aug or Sept.....if this happens we will see a lot of rates under 4%. For every 0.25% cut...I gain about 12k in positive cash flow...so looking forward to it.....not so good for retirees....
     
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  8. bumskins

    bumskins Well-Known Member

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    I think your linking two different things. Yes the current trajectory for rates is down (but thats without a ratings change).

    The ratings downgrade talked about is seen as a ways off. A downgrade should increase the cost of sourcing funds.
     
  9. Skilled_Migrant

    Skilled_Migrant Well-Known Member

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    There are quite a few factors inter-playing at the moment:
    • Ratings downgrade.
    • Additional Equity raising required by the banks under APRA guidelines.
    • Basel IV yet to be finalized.
    • Brexit
    • Bank bashing by the pollies.
    @euro73 how would the ratings downgrade play out for interest rates as per your assessment and sources ?
     
  10. euro73

    euro73 Well-Known Member Business Member

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    Consenus is 15-20 basis points increase to cost of funds if there was 1 more ratings downgrade. This single downgrade to Govt isnt expected to have any material impact on the banks. A further downgrade isnt expected though, so I dont see any real pressure on costs of funds from this.

    The bigger risk is the increase to cost of funds from the next capital raising exercise expected in 2017... and the transition from 90 and 180 day bond terms to 12 month bond terms. ie the BASEL IV stuff. That could add up to 30-40 basis points

    But if the RBA cuts once or twice, the net impact will be very little to the actual rates borrowers are already paying today, although I suspect the banks would whack I/O lending for the majority of it, so they could offer even lower P&I rates.... P&I lending is the are where they dont have any speed limits, so it's where they are going to be competing hardest for new business and refinance business.

    If there were no further RBA cuts, you could expect modest increases throughout 2017 , and again, I suspect the banks would whack I/O lending for the majority of it, so they could keep P&I rates as low as possible.
     
    Last edited: 13th Jul, 2016
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  11. sash

    sash Well-Known Member

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    Gents....... the real issues are these:

    1. Instability not only in Europe but also China's growth trajectory.
    2. NSW real estate market now has very clear signs it is slowing...and in the apartment sector settlement completions are starting to show cracks. If a few developers go down as a result..it will get very interesting.
    3. The rating down grade is going to have to be kept in perspective with other countries. The real rates are still very high and stability here is better than other parts of the world. So the willingness to put money into Australia is higher than Europe or China or USA (given uncertainty of the political candidates)
    4. People are underestimating what the BREXIT impact is. If LePenn gets in France....it will get even more interesting....
    5. I also feel that the banks will be prepared to accept less growth but more stable profit growth. Even the Super funds are signalling this.

    My thoughts....I am watching with anticipation in Sydney....this will be the market to watch in the next few years...particularly the new home market. At this stage I would not touch anything new in NSW given the valuations which are coming on these sort of properties. It will not be contained to new stuff older stuff will also get hit just as not badly.