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).
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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.
Inflation was slightly higher in December than expected. Inflation kicked off with oil price shocks caused by the Russia/Ukraine conflict, so rate rises did feel a “bit unfair” to many.
However, in December one of the single biggest contributors was travel and holidays. After two years of disappointment, we all spent whatever it took to have a holiday (and so we should). But that is 100% discretionary spending, on us. Too much money chasing too few goods. That always has a bad end – with the price of everything going up. Inflation kills wealth and inflation has to be controlled.
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