How low will interest rates go?

[Property Dude]

Interest rates are on the way down.

My question is, how low will they go and how long will they stay low?

...and what impact will this have on property prices? :confused:

[bluelabel]

There is much talk about interest rates going as low as 2-3% here in Aus and even lower to 0% in other countries especially in Europe. I feel that 2-3% is fair but here is my question; at what long term cost will this be?

I realise that the idea is to stimulate business growth and capital expenditure and obviously create or maintain jobs within the economy or are we just going to see a continuation of the current debt bubble that has not been let to fully 'pop.'

Interest rates, I feel, may hit the low point by the end of next year and probably stay that way for maybe 12 - 18 months before slowly heading back up and stabilising around 4-5% by about 2012. I have no basis or theory to base this upon; it’s just a gut feel. I feel the current interest rate cut is not going to teach people the lessons of the current debt bubble and they are going to continue buying their plasma screens and Toorak tractors for their McMansions on an extended mortgage, thus continuing the crisis we are in.

The only good thing is that no deposit home loans should be out the door by then so the people who shouldn’t have been able to afford it this time around wont be able to next time.

As for house prices in all of this, I am still seeing signs of prices coming down a little in my area (SE Melbourne) in the $500k to $1Mil category as well as the high $400's coming down to low $400's. Over time I feel this may settle a bit and maintain a norm about 7-10% below what we are seeing now. This may only last for a year or 2 at the max until normal capital growth will surpass the deflation in prices. I only hope that people this time around aren’t suckered in by real estate agents and buying into houses just for prestige instead of buying a home for their family. (i.e. they are not buying above their range)

:bier:

blue

[2BAD4U]

I believed another 0.50 - 0.75 was on the cards and with the US cutting rates today to 0.00 - 0.25, then I hold that belief more firmly now. As for any lower than that, I think the economy (and housing prices) would have to fall more than is currently predicted for any bigger rate cuts.

If/when rates are cut in Feb 09, then that will be my signal to start locking in my loans on fixed rates.

[kincella]

I did predict the last two rate cuts ...and I believe the rba will cut it again by 1%...I doubt they will wait until Jan 09....figures from retailers are already down,,,so a base rate of 3.25 is still the highest in the world....that means interest rates for home loans of 4.25 it is still too high..but better than the almost 10% I have been paying
I am hoping for home loans to go down to 3% and then I will lock it in for about 3-5 years...
happy days are coming for homeowners

[kincella]

and small businesses....who are amongst the largest employers in this country, the alternate is the government would be paying out far more in unemployment benefits for all those jobs that are about to be lost.

Unfortunately the banks and lenders are waiting weeks to pass on the costs, and some are not passing on all of the rate cuts...

More pain to come in the stockmarket...look at CBA this week and the mess...capital raising and a further 2 billion in bad debts....
so there will be even more investors turn away from stocks, and bank depost rates will continue to go down....what is the safest investment left.....but that one is qualified....its only safe if it is chosen wisely.....and not like Sydney's West where they were selling housing commission homes for $300,000 to people with no jobs...or income....

[Passive]

and small businesses....who are amongst the largest employers in this country, the alternate is the government would be paying out far more in unemployment benefits for all those jobs that are about to be lost.

Unfortunately the banks and lenders are waiting weeks to pass on the costs, and some are not passing on all of the rate cuts...

More pain to come in the stockmarket...look at CBA this week and the mess...capital raising and a further 2 billion in bad debts....
so there will be even more investors turn away from stocks, and bank depost rates will continue to go down....what is the safest investment left.....but that one is qualified....its only safe if it is chosen wisely.....and not like Sydney's West where they were selling housing commission homes for $300,000 to people with no jobs...or income....
G'day Kincella
Good to see your post - must be the same nick!
You correctly predicted rate drops I recall and I remember getting on my soapbox in Sept stating that the .25% drop was meaningless and we would have the RBA chasing rates down quicksmart and it has happened despite the analysts and economists saying otherwise. I really do believe you will be able to take your time in fixing between the 2-3% range and that they will not be able to hurry on rate rises until such time as the economy fires.

All the signs are highly favourable for Vic and to some extent NSW.

WA is not nearly the basket case many portray / has slowed but is still historically high and only the foolhardy are paying. Its all changing in our favour again and whilst these are unique times I have never seen so much being thrown at so much by so many that when traction occurs in the world economies those of us with tangible assets will be the beneficiaries.

Cheers

[kincella]

hi passive....yes its me....missed you on that other site....just need LE and a couple of the sensible others to come over here....
figured most of the bears live in WA hence the sentiment....but they talk as if it is the one size fits all australia wide
noticed a dramatic trend in Albury last week on the realestate site....suddenly there was all these new homes listed.....at much higher prices...for months there has been the bottom of the market on that site, and selling at a premium imo, think the range I follow is missing, not in the market, and a similar prop to mine was listed at 385,000 who knows what they will sell it for...but its on a busy street, whereas mine is in a circuit, with a lovely big park in the centre..and mine is closer to the city centre...

anyway I believed it was a dramatic turn....and now Dec they are selling on average two houses a day (its been 1 a day since mar 08, then 1.5 since sept)....a mixture of above average houses, and some fhb types...they do not state the selling price in most cases....
I know its the peak time for selling houses....but its the type of house middle to higher end range that is now selling rather than just the fhb
cheers

[2BAD4U]

....figured most of the bears live in WA hence the sentiment....

The thing about WA is it operates almost completely out of cycle with the rest of Australia (in Real Estate terms). If you invest in WA you need to understand this. Perth hit #2 in median house prices not that long ago, soon we will be #4 or #5 again and not because Perth falls, but because the other states start moving again.

I stopped listening to "Australia" years ago and focused on what was happening locally. What alot of the bears forget (particularly in discussions on ASF) is that the housing market is driven by the common person, not the astute investors that they think everyone is. The common person will see the interest rates come down and realise they can achieve the "great aussie dream" of owning a home and will start buying. Driven purely by emotion and not taking too much notice of the economy.

[2BAD4U]

I'm actually starting to change my mind now and wouldn't be surprised if we don't see anymore rate cuts. In times of cost-push inflation, monetary policy can cause a spiralling problem. With oil coming back, all I am waiting for now is the next CPI figures to see where the increases come from. If oil stays low and food increases are only moderate, then that could be enough for the RBA not to cut rates any more.

[kincella]

hmmm, thats the theme in the news yesterday.....I am not convinced....in the middle of some research about Japans problems for the past 2 decades...the biggest problem with their housing woes,....

BOJ did not cut interest rates early enough, ie in the late 80's when housing problems started,, left their rates too high and did not proceed to cut the rates until 1995 by which time it was too late....

the banks stopped lending,...and the banks did not address the bad loan problem....

Japan has a lifetime workforce policy....companies are deterred from laying off workers, regardless of the economic woes for the company,,

almost a zilch immigration policy, 20% of the population is aged over 65...

a couple of links
http://www.npr.org/templates/story/story.php?storyId=88156284
http://www.atimes.com/atimes/Japan/JG16Dh01.html
http://search.japantimes.co.jp/cgi-bin/nb20071022jp.html

[Property Dude]

Interest rates could hit 1960s levels - analysts

By Stephen Johnson
AAP
January 19, 2009 11:46am

* Inflation indicator falls to fresh low
* Could push RBA to cut rates 'aggressively'
* Rates could hit 3.5pc next month

A KEY inflation measure has fallen to the lowest level in more than three years, possibly paving the way for 1960s interest rates by next month.

The TD Securities-Melbourne Institute inflation gauge has fallen for three months in a row for the first time since the series began, sparking concerns that deflation could be a big issue this year.

TD Securities' Joshua Williamson said a fall in inflation could push Reserve Bank to cut interest rates by 75 basis points next month.

This would take the cash rate to 3.5 per cent, a level last seen in early 1965.

http://www.news.com.au/story/0,,24930968-2,00.html

Looks like some relief ahead for those with mortgages! :)

[gfresh]

Personally, I think fixed mortgages for 5 years will go down to low 6% only.. 6.0/6.1/6.2%.. not low 5's or anything like that.

3 year probably a bit lower, but only because the banks know by the end of 3 years, rates will be back over that, and they'll capture people at higher rates.

Variable may hunt down to high 4's or low 5's for a few months, but I think this will only be a short window before global funding pressures force them back up again, and possibly quickly.

The other reason I don't think they will last, if rates go that low, and there is no corresponding increase in loan activity, the banks will probably start thinking "why are we offering rates so low we're not a charity", and instead bump them back again to profit from their existing loan book.

[kincella]

gfresh....cba currently has on offer 5.4% 1 year fixed and average of 6.4% for 5 years...variable is 6.04 now....
some have been offering 3.99% fixed rates for a year.
here is the cba list
http://www.commbank.com.au/personal/apply-online/download-printed-forms/home-loan-update-002842.pdf

[kincella]

woo hoo good news for all...but why do we have to wait till next week
that 2% cut is looking good...do they have the gutz to do it now...or wait longer until more jobs are lost

http://www.news.com.au/business/story/0,27753,24978518-31037,00.html

--------------------------------------------------------------------------------
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Ever met a wealthy person who complains and moans about everything ?

*** The best way to become a millionaire is to borrow a million dollars and have your renters pay it off.
Jack Miller

[barry2007]

I cant wait for next Tuesday 1430EST!! I feel like a kid at Christmas... Maybe the reserve should have held that extra meeting in January? Either way it's going to be a big cut and one all homeowners will look foward too. Soon enough if not already there will be alot of positive geared properties and happy investors around. Lets not forget the potentual to find a positive geared IP from day 1!!!!

[kincella]

heard on bbc radio this morning....the unofficial message from swan...and he was heard to say...he has 400 points to play with...being the difference between our rate of 4.25 and the US rate of .25.....
thats what he said when he addressed whatever meeting in the US last week...
wish they were brave enough to drop it 2% now....there has been nothing but bad news from all sectors so far...and its only going to get worse
cheers

[Kevin]

I know it is always nice if you need to borrow money for the interest rates to be low but if the rates go down by what some economists predict the rates will not be an issue for investors and therefore become slightly irrelevant.

I say this because recently a friend and I tried to borrow about $195k between us to purchase a property and were knocked back for finance. In itself it is not unusual but given that my friend and I earn about $170k between us in salaried positions and the property was for an investment and returning a higher rate of return than the interest rates the banks were charging makes it crazy.

I think the banks have gone from one extreme to the other and will no longer take any risk at all.

In my opinion this cold have a greater effect on property prices in the short to medium term than the actual interest rate. If there are such restrictions on borrowing there will be very few buyers.

Kevin
http://forum.thepropertydomain.com/

[gfresh]

Sounds unusual to be knocked back with that position. Banks must be worried about that area falling in value?

Shall be interesting to see the effect with rates coming down next Tuesday. You would think most who were buying on variable would have already factored in the falls, and not bothered holding off, but shall see. Maybe there will be a psychological effect with the rates actually being that low that will spur some buyers.

Personally I am hoping for a 5.5-6% fixed rate available for 5 or 10 years, but will see if the banks are kind enough to deliver this or not.

How long do people think variable rates will stay under 6% ? 1 year? 2 years? 3 years? I am thinking somewhere near 12-18 months?

[barry2007]

Hi gfresh,

I found a lender last month offering 6.44% for 10 years. I'm hoping the banks will be kind enough by June to let me lock in in at least the low 5's range for 7-10 years. That would suit my circumstances perfectly.

Cheers,

[gfresh]

6.44% for 10yrs .. which lender?

At the moment looks like the majors are not dropping much on fixed after the latest RBA reduction, which seems to indicate the bottom of the cycle will be reached soon.

Westpac has 6.49% for 5 years

3 years is 5.69% .. so a pretty big gap between 3 and 5.

[barry2007]

Hello gfresh,

That lender was a non bank lender called Statecustodians.

Have you used this link before (sometimes it's a day or 2 behind)?

http://www.canstar.com.au/interest-rate-comparison/compare-home-loan-rates.html

Also Kincella pointed out this link for CBA (not bad for 15 years pending your position)
http://www.commbank.com.au/personal/apply-online/download-printed-forms/home-loan-update-002842.pdf

Look's like the RBA will still continue rate cuts but on a smaller scale. I'm still waiting to pick "a bottom" that suits me and lock away for a long time hopefully around mid year.

Cheers,

[kincella]

its looking really good now....wow 2% but we would expect to be charge 3% for loans...might even go for that new car at this rate....or another little bargain IP

RBA eyes more rate cuts Chris Zappone
February 17, 2009 - 11:34AM
The Reserve Bank of Australia says interest rates may hit a 'trough' of 2% later this year, implying more rate cuts to come.

The comment was contained in minutes released by the RBA this morning of its board meeting last month. That meeting resulted in the RBA cutting its key cash rate by another one percentage point to 3.25%, the lowest since 1964.

More to come

czappone@fairfax.com.au
BusinessDay





http://business.theage.com.au/business/rba-eyes-more-rate-cuts-20090217-89rg.html

[gfresh]

Shows there may be more pain to come!

To be honest, I'd be happier if rates stabilised for a while, would show the RBA believes things may improve.

Rates are quite good at the moment, and rent vs mortgage repayments are getting quite small.. going too low may encourage some to get over their heads when they rise.

[kincella]

the rba increased the rates too fast, and too slow in reducing them,,imo
potsy figures just out..for retail...thats nothing...people losing jobs everyday...they will need those rate cuts to hang onto the house...and other business will need it to keep the employees in jobs...
still believe we will get the cash rate to 2% before they need time to ...look and think anymore.... they should have done it now....later may be too late for some

[Property Dude]

Anyone expecting a cut in official interest rates next Tuesday?

If so, will the banks pass it on?

[kincella]

not I, not unless we get all the bad news in first...problem is the RBA meets and then for 2 weeks following , nasty reports come out....
the reports should be tabled before the RBA meets...
I am expecting another cut before Sep 09...
in the meantime I am happy with the 5% rate

[bluelabel]

I think rates will stay pretty level for the moment. I think the economy is breeding a false sense of security. I feel people are thinking the worst is over, but i think the worst could still be to come. For the amount of bubble there just hasnt been that big a pop. i kind of agree iwth kincella that rates might drop again around the sept - nov mark when the bubble leaks a little more.

:bier:

blue

[kincella]

copied my post from the sister site...
I think the RBA is too focused on housing, instead of the business community...
I believe business rates are 10% plus....and grossly unfair for small business...which are this countries biggest employers.....
they should be cutting the rates now...not waiting for disastrous figures to arrive in Sep when it will be too late to save the jobs.....
here are extracts from todays article..........

Still scope for interest rate cuts: RBA
Mr Stevens said it was likely economic activity remained subdued in the June quarter, with the rapid decline in business investment "almost certainly continuing".

But figures which have shown a pick-up in borrowing for housing over the past six months was "what would be expected if an upturn in residential investment spending is to begin later in the year".

"It would be counterproductive, though, if further reductions in interest rates induced a large number of marginal borrowers into debts they could service only at unusually low interest rates

http://www.news.com.au/business/stor...14-462,00.html
__________________
Property Investor in Commercial and Residential. I hold for 10 years or the mv reaches my sell figure

[Property]

Interest rates depends on the stability of the economy. The way of investment is buying a home when economy is low then reselling it in boom...

Regards

[francinemelbour]

HOW LOW CAN THEY GO? According to this source http://online.barrons.com/article/SB50001424052970203296004575320870072975454.html

[FirstLoaner]

This is a very interesting thread considering the recent interest rate hikes!

[evankirsten]

In my opinion, this cold has a greater effect on housing prices in the short and medium term real interest rates. If no such restrictions on loans, there will be few buyers.

[jbocker]

Well we had two drops in consecutive months at the end of 2011. Nothing to do with the property market, it was an incentive for people to spend on retail for the prized Xmas retail period.
Would not read any more into it than that.

Be interesting to see what will happen in the first several months of next year. I dont expect much change in rates maybe a drop rather than an increase.