Got a massive mortgage? Rest easy, for now – you could get a rate cut

Thu, 13 Apr 2017  |  

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/got-huge-mortgage-rest-easy-now-231105702.html 

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Got a massive mortgage? Rest easy, for now – you could get a rate cut

Everyone with a large mortgage can rest assured for a while, given that an interest rate hike is unlikely in the next year and if anything, the next move in rates will be a cut.

The market has been speculating about the need for an interest rate hike as the global economy improves and for reasons linked to dealing with house prices in Sydney and Melbourne. The latter point is remarkably silly and ignores one critical factor that always feeds into RBA deliberations – unemployment.

Since December 2002, the Reserve Bank of Australia has hiked interest rates on 17 occasions. Of course, there have been a series of interest rates cuts over that time as well, but it is clear that the unemployment rate is a factor of substance that feeds into the decision to tighten monetary policy.

Those 17 interest rate increases over 15 years have occurred against a range of differing backdrops – the removal of emergency stimulus, dealing with the inflation surge from the terms of trade boom and simply managing the economy in a prudent way, with an eye on keeping the inflation rate on target at between 2 and 3 per cent.

A standout issue for the RBA over the 15 years of modern monetary policy management is that it has never hiked interest rates when the unemployment rate has been above 5.7 per cent.
This begs the question about monetary policy considerations now, with the speculation about an RBA rate hike. These views are a little strange, not just because the current unemployment rate is 5.9 per cent, but because inflation is currently below the bottom of the target band, wages growth is at a record low and bottom line GDP is still some way below trend.

Indeed, just three of the last 17 rate hikes have occurred with unemployment at 5.6 per cent or 5.7 per cent; a further four rate hikes have occurred with unemployment at 5.3 to 5.5 per cent; a further three with unemployment at 5.0 to 5.2 per cent with the remaining seven hikes delivered with an unemployment rate at 4.9 per cent or lower.

This no doubt reflects the RBA judgment that the unemployment rate associated with full employment and the risk of rising inflation is around 5 per cent. If the economy is growing strongly and the unemployment rate is on track to hit or even break below 5 per cent, inflation risks are building and with the, tighter monetary policy in the form of interest rates hikes are needed.

It is a strategy that has, on balance, worked well.

For now, there seems little chance for the unemployment rate heading to 5 per cent. On Thursday, there will be the regular monthly update on the labour force which will provide an update on employment and the unemployment rate. It needs to be a strong result for there to be any credibility in the interest rate hike forecasts. If not, it seems likely that rates will be on hold a lot longer and if there is a move in the unemployment rate to 6 per cent, or higher, the RBA and market will soon change its tune and an interest rate cut will be on the agenda.

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The Australian stock market is a global dog.

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This article first appeared on the Yahoo7 web page at this link: https://au.finance.yahoo.com/news/1381246-234254873.html 

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The Australian stock market is a global dog.

At a time when stock markets in the big, industrialised countries are zooming to record high after record high, the ASX200 index is going no where. So poor has the performance been that the ASX is around 20 per cent below the level prevailing in 2008.

It is a picture most evident in the last few years. Since the middle of 2013, the ASX 200 has risen by just 10 per cent. The US stock market, by contrast, has risen by 50 per cent, in Germany the rise has been 55 per cent, in Canada the rise has been 20 per cent, in Japan the rise has been 45 per cent while in the UK, with all its troubles, the rise has been 15 per cent.

So what has gone wrong?

Tony Abbott and debt

Fri, 16 Jun 2017

With Tony Abbott and governemnt debt hot news topics at the moment, I thought I would repost this artricle which I wrote in April 2013:

Enjoy, SK

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Here’s a true story. It’s about a man called Tony.

Tony is a hard working Aussie, doing his best to provide for his family. He has a good job, but such is the nature of his work that his income is subject to unpredictable, sharp and sudden changes.

Tony’s much loved and wonderful children go to a private school and wow, those fees that he choses to pay are high. He used to have a moderate mortgage, especially given he was doing well with an income well over $200,000 per annum.

Then things on the income side turned sour.

Tony had a change in work status that resulted in his annual income dropping by around $90,000 – a big loss in anyone’s language.

How did Tony respond to this 40 per cent drop in income?

Well, rather than selling the house and moving into smaller, more affordable premises, or taking his children out of the private school system and saving tens of thousands of after tax dollars, Tony called up his friendly mortgage provider and refinanced his mortgage.

In other words, Tony took on a huge chunk of extra debt so that he could maintain his family’s lifestyle. No belt tightening, no attempt to live within his means, just more debt.