RBA increases cash rate to 6.75%

Discussion in 'Loans & Mortgage Brokers' started by Nigel Ward, 7th Nov, 2007.

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  1. crc_error

    crc_error The Rule of 72

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    Did the interest rates jump that quickly back then? Gee!!
     
  2. TryHard

    TryHard Well-Known Member

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    If memory serves correct, yep they did. Someone might correct me on exact dates but it was 1988 / 89 cos I bought when Expo 88 was on.


    I have no idea what rental yields were doing but that's one example of capital growth at the same time as major hikes in the cash rate ... under otherwise different economic circumstances I guess... but just goes to so you can't "assume" ;-)

    It was a basic lowset brick with no work done at all between buy and sell, 30 mins from Brisbane CBD, in case you were wondering ...

    PS Edit :
    RBA: About Monetary Policy

    http://www.rba.gov.au/MonetaryPolicy/_Images/short_term_291007.gif
     
  3. coopranos

    coopranos Well-Known Member

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    Rubuttal of what? He implied that a rate rise would cause real estate prices to plummet but share prices would remain steady.
    He justified this by saying that because people keep buying things that share prices would always go up. Not only does this show a lack of understanding of the share market, it also defies the rules of logic.
    I have had brick walls give me a more credible "rebuttale" than that.
    Fair enough, bag property if you have a valid point to make. We can then have an informed and intelligent discussion about it. but dont argue out of utter ignorance.
    I dont disagree that a rate rise puts pressure on real estate prices, but to suggest it doesnt put similar pressure on share prices because people eat food is completely ridiculous.
    To even suggest that share prices only reflect company earnings is also ridiculous.
    I however have been guilty of being an idiot by using the following logic:
    P1: An idiot makes no sense when he makes an argument.
    P2: It takes at least 2 people to argue.
    P3: An argument that makes no sense makes no sense for either party.
    C1: Therefore If you argue with an idiot, you now have at least 2 idiots.
    P4: Crc makes no sense when he makes an argument.
    P5: I argued with an idiot.
    C2: Therefore I am also an idiot.
     
  4. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Hahahahaha.
     
  5. crc_error

    crc_error The Rule of 72

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    Where did I say property prices will plummet? to remind you what I said lets quote it again: This is bad news for property investors... will most certainly slow down capital gains in IP. Did I say prices will plummet? I said it will slow down capital gains. please don't twist what I said.

    Just as rediculas to suggest people have to live in houses, hence their prices wont fall or level out.. lets look at the situation in the US, people have to live in houses, how come they are dropping by as much as 40%?

    How will increase in mortgage rates effect share prices directly? Since when do you need a mortgage to buy shares? When interest rates go up, it lowers the borrowing capacity of buyers, hence buyers can't spend as much, directly putting pressure on the house prices... this isn't the case with shares.. People will still put their super money into the share market next week, even after a rate rise..
     
  6. coopranos

    coopranos Well-Known Member

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    At the risk of becoming more of an idiot, for your enlightenment:
    Investors require a certain premium for the risk they take on any investment.
    The premium is the extra return they require over and above what they would get on an effectively risk free investment - interest from a bank deposit.
    As the risk free investment return increases, the risk premium required for any other investment (ie shares) also goes up.
    As the risk premium goes up, the share price goes down to adjust for that increased risk premium requirement.
    For example:
    An investor can currently get 5% on a risk free bank account. he requires a 5% premium for taking the risk of purchasing a share.
    A particular share is $10, and has a return of $1 (10% return).This fits the bill nicely for our investor.
    Unfortunatley, interest rates go up 2% and now the risk free bank account gives 7%. Now our investor requires a 12%. Strangely enough, the share doesnt magically start to return $1.20, it is still only the $1. To get his required premium, he will not buy the share unless the share price is $8.33. That is a share price fall on an interest rate increase. Notice the underlying performance of the company does not come into play at all.
    Conversely if the interest rate drops, the share price will increase.

    If he cannot get his required risk premium, he wont buy the share and will leave the money in the bank.
     
  7. Handyandy

    Handyandy Well-Known Member

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    Had property back in the 80's.

    Bought a townhouse in 88 for $91k refinanced about 6 months later with a loan for $100k after the interest rate had gone up to 24%:eek: after starting at 12% (it was a commercial loan). I wasn't advised that the interest rates had increased until the 6 monthly statement was sent out. The value of the property had increased to about $150k where it stayed until well into the 90's.

    The main reason that I hadn't woken up to the massive increase is that it started out less that the resi rate and the resi rate hadn't been increased to over about 16-17%.

    In the end I refinanced at 17% fixed for a year and a half (I think)

    The share market crashed in 87 and had no affect on the interest rate apart from maybe lowering the rate temporarily (alah my commercial loan). The market crashed from about 2300 down to 1100 and did not recover to about the 2300 until 94, with the main recover from 93 onward.

    Further on the Brisbane RE. It boomed big time for the Expo and then did nothing until the late 90's and even early 00's.


    As far as yields are concerned. When I first bought in 85 the yields were about 10-12% with the maximum interest rate about 14%. (you had different int rate for PPOR compared to IP) When I bought again in 87 the yield was about 10%. The interest rates went through the roof as per the above. At some point along the way the government capped interest rates at 14% so my first Ip never rose to more than this.

    The main reason for the increases in interest rates was to stop the RE boom with the interest rate increases being 1% not this wimpy .25%.

    I am sure someone can find all the official interest rates. I am just quoting from memory.

    Cheers

    PS just saw the chart Carl has posted so pretty well correlates to how I remember things
     
  8. BillV

    BillV Well-Known Member

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    I have mixed feelings with the RBA's decision to increase rates.

    I am naturally dissapointed as their decision was taken during an election period and it could give an unfair advantage to 1 of the 2 political sides.

    I am also annoyed because my property holding costs will now increase but on the other hand I see this event as an opportunity to look for more bargains.

    If Glen Stevens thinks that a 0.25% increase is going to stop property investors from borrowing he is mistaken. People have discovered LOC's and most of us are cashed up and waiting...:)

    Cheers
     
  9. FrankGrimes

    FrankGrimes Well-Known Member

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    I'm with you - surely it could wait a month, even if it meant a 0.5% increase afterwards. They have potentially caused a change in government.
     
  10. islandgirl__

    islandgirl__ Well-Known Member

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    I may be on the wrong track here and I haven't had nearly enough coffee yet but didn't I hear a month or so ago that if you compare current mortgage repayments against average income most people are paying today a higher % of there income in mortgage payments than they were when interest rates were 18%.
     
  11. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    That's a bad thing how? I'm not aligned to any one particular party, but this rise has pretty much guaranteed a win for the lesser of two evils.

    Mark
     
  12. coopranos

    coopranos Well-Known Member

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    Yes, Labour have a fantastic record of prudent fiscal policy - run the budget into massive deficits and when the economy goes belly up just blame the "recession we had to have"
    Elections are won and lost not on policy or who is most competent to run the country, but because the average punter has a short memory, gets complacent, and thinks the grass is always greener.
     
  13. Glebe

    Glebe Well-Known Member

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    tough luck!
     
  14. tailcat

    tailcat Well-Known Member

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    18% of $50000 = $9000

    8% of $500000 = $40000

    Household income has increases by a factor of Y over the same period.

    If Y is less then 4 (i.e. income has not quadrupled over this period) then the interest repayments are a larger % of income now than then.

    Tailcat
     
  15. crc_error

    crc_error The Rule of 72

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  16. crc_error

    crc_error The Rule of 72

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    This is a interesting read about interest rates..

    ALP rates record is a concern | The Australian

    one point of interest I found was:

    Daily cash rate data from January 1979 to October 2007 shows the median interest rate for the Labor years is 11.75 per cent, compared with the Coalition years (including Fraser) of 5.5 per cent.

    What happened to overseas interest rates during these periods? Were international interest rates (such as the US federal funds rate) higher during the Labor years?

    The answer is yes, but not by much. The US median rate was 6.79per cent during the Labor years and 5.26 per cent during Coalition years. In other words, the data shows that even allowing for international factors beyond the control of domestic policymakers, Labor governments are associated with much higher interest rates than Coalition governments.

    Much is made of three-month interest rates during the late 1970s and early '80s while John Howard was treasurer. We examined those figures as well, using data on three-month rates from January 1976 to October 2007. The median three-month interest rate for the Labor years is 11.75 per cent, compared with the Coalition years (including Fraser) of 5.5 per cent.


    Sounds like Kevin Rudd is twisting the truth about interest rates!
     
  17. TryHard

    TryHard Well-Known Member

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    He's a politician. Twisting the truth is in their job description. Children overboard anyone ? They're all as bad as each other ... :mad:
     
  18. crc_error

    crc_error The Rule of 72

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    that might be the case, but the fact remains, if Rudd gets in, rates will be higher on average under his government.. history proves it. history doesn't lie.

    if people think that voting out howard because of increasing interest rates, and voting in labor who has a proven track record of higher interest rates, then they are fooled by the kevin07 campaign..
     
  19. TryHard

    TryHard Well-Known Member

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    You're right, history doesn't lie, politicians do. I wouldn't go so far as to second-guess Labor's likely economic management outcomes based on an article written by a guy called "Sinclair" - sounds about as right-wing as you can get :) If you subscribe to the theory the Gumbyment actually has much influence over the RBA and interest rates, Little Johnny has another couple of weeks at least in power - we might see another few rate rises in that time if he can take some time off pulping Tasmania and sending Aussies off to fight someone else's war. I'm still not saying Rudd would be any better.
     
  20. Rod_WA

    Rod_WA Well-Known Member

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    Coop vs CRC - or is that property vs shares again?

    One fundamental thing that I think has been overlooked is the cost of borrowings for companies. If interest rates go up, so too does the cost of doing business, so profits can be reduced, or growth plans can be pushed out due to higher borrowing costs.

    So, then the earnings of companies is stunted, and this will directly affect the share price. So, shares will definitely be under pressure if rates rise.
     

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