Watch out! Your mortgage rates are about to rise

Fri, 29 Jun 2018  |  

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/watch-mortgage-rates-rise-001427435.html 

--------------------------------------------------------

Watch out! Your mortgage rates are about to rise

Have you got a mortgage?

Beware! Your interest rates are on the rise and it has nothing to do with the Reserve Bank changes in official rates. Higher mortgage rates are starting to flow because the banks are confronting higher borrowing costs because of a jump in money market interest rates that has been linked to the interest rate hikes in the US and a tightening in global credit conditions.

For owner-occupier loans, the Bank of Queensland has announced an increase of 9 basis points (0.09 percentage points) for principal and interest rate loans and 15 basis points move for interest only loans. The other banks are certain to follow as they struggle to maintain their net interest margins in the wake of the surge in the cost of capital.

While 10 or 15 basis points doesn’t sound like a significant change in borrowing costs, it is about to hit borrowers repayment schedules at a time when household incomes are already being squeezed by near record low wages growth, an uncertain outlook for employment, falling wealth as the house price cycle turns lower and low savings.

A 10 basis point interest rate rise will, for example, add $500 a year to the interest cost on a $500,000 mortgage. That is $500 that will not be spent in the economy as mortgage holders increase their repayments.

And that might just be the start of it.

Unless the market conditions change in the next month or so, further increases would seem assured. Of course, the RBA could act to offset this negative influence on the economy with a cut in official interest rates. A 25 basis point cut in official rates to 1.25 per cent would broadly neutralise the current pressures on bank margins. Such a cut would certainly not be be passed on to consumers in full, if at all, which means that the overall stance of monetary policy would be little changed, rather than more restrictive as is currently the case as the rate rises flow through.

At the moment, there seems little hope of this with the RBA Governor Phillip Lowe suggesting that the next move in official rates is more likely to be up than down.

Lowe seems wedded to this view, notwithstanding a raft of data showing the economy just muddling along, with weakness in housing, wages and consumer spending. Importantly, inflation remains below the RBA target which means there is scope for lower official interest rates on macroeconomic grounds over and above the recent uptick in bank borrowing costs and lending rates.

Economic conditions over the second half of 2018 and into 2019 are increasingly fragile.

With the debate over the upcoming election throwing up uncertainty on tax policy, business and consumers alike risk hunkering down with their borrowing, spending and investing until the election is held and the new government formed. House prices are falling and there is no end in sight to the declines. The out of cycle bank interest rate rises will only exacerbate the price weakness which threatens to reduce the wealth of home owners which will have consequences for spending and new spending.

Managing the economy is not easy and pragmatism must prevail. In the past, the RBA has shown such pragmatism with unexpected changes in interest rates being delivered when there have been unexpected changed in economic conditions.
In the mean time, get set to pay more for your mortgage and watch closely for a change in view from the RBA once it realizes the economy is not quite as strong as it wished for.

comments powered by Disqus

THE LATEST FROM THE KOUK

The houe price bet is on! Tony Locantro takes the offer

Fri, 21 Sep 2018

While Martin North from DFA rejected my generous offer to have a wager based on his call for a 40 to 45 per cent fall in house prices, Tony Locantro, an Investment Manager with Alto Capital in Perth has decided to take up the offer on the same terms that I offered Mr North.

Specifically, we are wagering $15,000 to $2,500 that Sydney or Melbourne or national wide house prices will or will not fall by more than 35 per cent from their peak at any stage before and up to the December quarter 2021.

The measure will be based on the Australian Bureau of Statistics Residential Property Price Indexes, Eight Capital Cities, Catalogue No. 6416.0.

This means that if, at any stage the price index for any of Sydney, Melbourne or the aggregate eight capital cities prices is down 35.0 per cent or more, I will give Tony $15,000 cash. Conversely, if by the time the December quarter 2021 data are published and the peak to trough decline is 34.9 per cent or less in Sydney, Melbourne or the eight capital cities, Tony has to give me $2,500.

Who knows, it might be the start of a wonderful friendship. We have added a nice informal touch – when the cash is handed over, the winner will buy a dinner with a nice bottle of red to console the loser.

I will be providing regular updates as the numbers roll out.

Trump boosts US stocks with borrowed government money

Thu, 20 Sep 2018

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/trump-boosts-us-stocks-borrowed-government-money-011637215.html 

--------------------------------------------------- 

Trump boosts US stocks with BORROWED government money

US stock prices continue to trade at near record highs and a lot of the recent rise has a lot to do with the policies of President Donald Trump.

The surge in the Dow Jones Industrial Average has been phenomenal. Since the November 2016 Presidential election, the Dow Jones is up around 50 per cent despite a few hiccups at the start of 2018 as the US Federal Reserve hiked interest rates and the threats of a US trade war turned into a reality.

The rise in US stocks, whilst impressive, is built on all the wrong things. ‘Wrong’, that is, in terms of sustainability.

As President, Donald Trump has delivered a range of tax cuts that have a total cost to the budget of around US$1.5 trillion. This one-off, impossible to replicate policy like any other policy that dumps cash into the economy has underpinned stronger economic growth and a temporary lift company profits. The tax changes has seen US companies engage in a record level of stock buy-backs which by design, has been a powerful driver behind rising share prices.

The problem with the Trump tax cuts is that every cent of the US$1.5 trillion has been funded with money borrowed by the government.

Such is the destruction to the US budget, that the US Congressional Budget Office is now estimating the US budget deficit to average a staggering 4.8 per cent of GDP in every year in the decade from 2018 to 2028. When Trump became President, the budget deficit had narrowed to just 2.5 per cent of GDP.