I have asked you (my clients) many times if you want to know my opinion on why interest rates and house price are as they are.
The clear answer is… NO ! What we do want from you – is what should we do…
Let me go back a bit first.
Every decade has had a defining moment:
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A report from a government committee has suggested that Australian Banks be forced to issue “Tracker Mortgages” (Aust Financial Review 27 March 2024).
Australian banks have unsurprisingly pushed back.
A “tracker mortgage” supposedly “tracks” the Reserve Bank cash rate so that your home loan rate remains at a fixed margin relative to the Reserve Bank cash rate.
The benefit is that a borrower will not be left (as currently happens) with a rate stranded high and dry well adrift of where it should be.
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There are things that can be taken as almost certain this year – so let’s plan for them.
On the money supply side:
No need for you to worry here – I will be able to deal with that for you in my scheduled 6 monthly reviews – it’s what I do for you.
So, let’s turn to getting ahead in life this year.
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This time WHY matters.
The 3-year bond rate in the US is 5.30%, the 10-year bond rate 4.65%.
The 3-year bond rate in Aust is 4.35%, the 10-year bond rate is 4.75%.
Banks BORROW to lend to you at the 3-year bond rate (among many other sources) – so money is COSTING the banks 4.35%
They can also borrow (overnight) from the Reserve Bank at the cash rate 4.10% – but the Reserve Bank also needs to borrow that to lend to the banks – so the Reserve Bank is making LOSSES at 4.10%.
Read more“The balance of risks now favour the prospect that the RBA is now on hold” – Bill Evans (The Australian Wed 2nd Aug 2023)
I predicted quite some time ago that the “peak” of this interest rate cycle would be 6% (to you) and that you should plan around that – and that appears to be correct.
Read moreShould it surprise us that 100% of economists on Monday became only 70% of economists by Wednesday?
I will carefully analyse what the Reserve Bank board says as well as Bill Evans.
I think it is possible that with this Reserve Bank board undergoing significant change by September that they wanted to fire one last shot – I will write in detail next week.
Today… I am aware that for some of my clients any interest rate change is now causing concern – meaning that all expenditure and income is under review given that the home loan is now vacuuming out more of your cash – that is the very point of the bluntness of the interest rate tool in order to cool an economy (post Covid).
Read moreIt is with a reasonable degree of confidence that I can say that interest rates have peaked (Bill Evans: The Weekend Australian: Sat 29th Apr: page 30).
At the start of this cycle, I suggested that you plan for a peak of 5.5% (and more recently 6% just to cover a worst case).
Interest rates, to you, have now peaked (if I am correct) at just under that 5.5%.
You should now budget for rates at this higher level for a reasonable period ahead.
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I am always open to opportunities with new lenders for my new to bank clients.
Under BID (Best Interest Duty) my obligations are clear – and they are obligations on me personally.
Banks have absolutely no obligations under BID.
This means that in the main – our interests do not align.
There is one place they do – new business.
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With the Reserve Bank likely lifting rates later today – how best to plan ahead.
I asked two clients recently if they were interested in hearing why rates are being lifted – and their answer could not have been clearer … “no – we read your emails because you tell us how to plan”
The so-called experts (and even Bill Evans from Westpac has changed his view a few times recently) seem divided but also in agreement on between 1 and 3 rates rises – including today’s.
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Covid came along and no government in the world quite knew how to respond… they planned for the worst.
