The 1st Interest Rate Thread

The current yield curve shows v. little chance of any IR move from the RBA for the next 18 months - only a v. slight possibility of easing.





It's looked v. similar for the past month - this is what it looked like at the end of May.

To give some perspective - back in the GFC days it looked like this.... and the next month the RBA cut by 1%.

The yield curve is updated every evening. It can be found here.

Interest rate changes is the biggest risk in property investing - it's worth keeping an eye on what the smart guys think the future holds.

 

Thanks KeithJ

 

This is great vs unnecessary worrying that rates will go up soon.

 

Prediction for next RBA meeting in July - no change.
Prediction for meeting in August - drop by 25%.
Why?
$20k stimulus won't have done zip, unemployment no better - possibly worse.

 

http://www.abs.gov.au/ausstats/[email protected]?Opendocument
Population at end Dec Qtr 2014
Change over previous year
Change over previous year
PRELIMINARY DATA
'000
'000
%
New South Wales
7 565.5
103.0
1.4
Victoria
5 866.4
101.5
1.8
Queensland
4750.5
64.2
1.4
South Australia
1691.5
14.8
0.9
Western Australia
2581.3
40.1
1.6
Tasmania
515.2
1.4
0.3
Northern Territory
244.3
0.9
0.4
Australian Capital Territory
387.6
4.3
1.1
Australia (a)
23 625.6
330.2
1.4
(a) Includes Other Territories comprising Jervis Bay Territory, Christmas Island and the Cocos (Keeling) Islands.

quote,,.

"Western Australia saw a near-halving of its net overseas migration figures, which dropped from 36,100 in 2013 to 18,900 this year. Queensland’s net overseas migration also fell from 35,100 to 24,200, a decline of 31 per cent. The Northern Territory’s figures also fell by over half to 1,900 people."

 

I'd like to keep Keithj's post kept as a sticky reference, something to always go back to.

On the assumption this forum doesnt have stickies I will have to mark this as a watch thread.

 

Maybe just start another post,on where you think the interest rates will be in 18 months time,

 

The RBA Guv, Stevo, concedes that Low GDP Growth could be the "new normal".

http://www.smh.com.au/business/comm...new-trend-without-reform-20150722-gihyp3.html

What does that mean for rates?

It means bye bye rate hike predictions for years to come.

 

Great info here. The big question now is even with a rate cut will the banks pass it onto investors?

 

How far into the future from the day of publication do you think that this tool is useful and in what way can property investors use it to their advantage?

You give an example of it's reliability a month in advance.

In April 2011 the curve was showing no cuts and in fact predicting a rate rise was likely by mid 2012:

http://web.archive.org/web/20110406...om.au/data/trt/ib_expectation_curve_graph.pdf

14 months later there had been 4 cuts and 1.25% lopped off the cash target rate.

 

Market is fully pricing in another rate cut in next 12 months.

Although I guess if this happens only owner occupiers will benefit.

 

I thought this was interesting read from Fin Review

http://www.afr.com/markets/equity-markets/the-rba-embraces-the-great-disconnect-20150726-gikjzd

MTR

 

Interesting with the data. But now that APRA has stepped in... Curbing or limiting the rate of lenders growing their investment loan book.. how else will the banks make money. Lift rstes which is what anz cba macquarie have noted so far.... Im currently 2/3 fixed for the bext 1-3 years... I will be fixing the other 1/3 for 3 years for more stability. Goi down to one income and a child.. all i have left variable is a $40k home loan with offset and a $112k owing margin loan

 

Hhmmm there could be a mad dash for investors to fix a bunch of loans for say 2-3 years. Just the ones for properties that are long term 'hold'.

 

good stuff...interest rates may not move up...but interest rates on IPs may move up!

 

The yield curve is useful in that it tells us what the smartest guys with the best macro information are thinking is the most likely IR in the future. These rates are based on probabilities eg the likelihood of unemployment figures coming in at X%. If the ABS releases the actual figures and they differ then the futures traders readjust their IR forecasts & the yield curve changes. This happens whenever any significant macro data is released (which is almost every week). Generally speaking, the forecasts are good and match the actuals, but there are occasional surprises....

In those 14 months the macro environment would have changed unexpectedly. Think about the alternative - if everyone had perfect information about the future, then the yield curve would be set in stone. We live in a world with imperfect information about the future - **** happens & stuff changes & consequently the curve changes with it.

So investors can use it as a tool to forecast the most likely trajectory of IRs based on the currently available information. If an investor places different probabilities on events (eg some here think unemployment is rising sharply, or that there is likely to be a war with Russia/China), then they should factor that in.

As an investor, my biggest expense is interest - I want the best possible currently available information on it's future direction. I fully accept that the yield curve is not perfect, but it the best estimation of those with $Ts at stake.

Other good sources are the major banks economists, the RBA minutes, and also the RBA Shadow Board, along with the various other economists.

Ironically the most recent yield curve has moved down a little, with a strong expectation of a cut by EOY. However, IMO it's unlikely that investors will be seeing much of it .

 

The macro environment sees constant "surprises". Often forecasts project a straight line (an expected average over a long period), where reality is far more volatile with economic conditions (& rates) moving in cycles.

The big $Ts who push this indicator around can adjust to conditions as economic updates come to hand, that's not so easy for an investor who may use the projection as a tool to lock in a fixed rate for a number of years (not so easy or cheap to change).

I think the "other economists" mentioned is probably a better place to look for views on interest rate changes more than a couple of months into the future, especially those who have a history of calling the trends correctly... there are only a small number I've come across who saw the current rate cut cycle coming.

 

APRA has added another layer of complexity to IR. Their moves recently will apply the brakes on about the only industry which was performing relatively well across the country (property).
This was the RBA's most significant argument against dropping rates further (adding further pressure to property - especially in Sydney).

I think they will 'wait and see' for a few more months to see what the market does. If the brakes are applied to property, they will be fairly keen to add a bit more of a boost to the remainder of the economy (lower rates). However, as an investor I would be surprised to see the banks pass on much, if any of this.

I would expect Australia's terms of trade to start to improve in the coming years, as some of the major mining projects move from construction to operation (ie building the capability to actually producing). The sale of the dirt/liquid will increase revenues (tax) but does little for the greater economy (compared to construction).

Also interesting to note - over the last few years the banks have successfully about 1% to their margins on home loans. Gradually increasing the spread by not passing on the full rate cuts.

Blacky

 

Please google the definition of "terms of trade". IMO it's gonna fall further.

 

Sorry - I meant balance of trade.