Could the RBA be dropping rates soon?

Good afternoon,

You will know that we have been talking about rates coming off as early as this year for a while now - it's contrarian but it doesn't mean the RBA won't; in our latest newsletter we have even touted the cash rate being 75bp lower in 2012 than it is now!

The reality is that with confidenec being as low as it is, the only thing that is likley to stimulate property and retail spending is an interest rate reduction or a change of government. Seems we aren't the only ones now, Ian Simpson from smartline has his finger on the financial pulse and I have referred to him before. I just received his latest thoughts on rates - supported by what the futures market think will happen, in other words what they have priced in...

Ian says, "The ASX Futures Market has had a fairly dramatic change of heart when it comes to the RBA cash rate over the last fortnight.

The chart below indicates the money market thinks that there is a strong chance the RBA cash rate will drop by 0.25% by October. There is even a 50/50 chance that rates may fall by a further 0.25% in April 2012.

The high Aussie Dollar is starting to take its toll on some sectors of the economy and the European debt crisis is not going away. Only yesterday we saw how tough retailers are doing it with David Jones reporting disastrous trading results.

As a result of this negative sentiment, the market is factoring in a need for the RBA to stimulate the economy rather than slow it down.

On the bright side, the underlying health of our economy is not as disastrous as it may seem (low unemployment, low inflation, high savings rates) so I think an interest rate cut or three will vastly improve this negative sentiment".

You might want to give some thought to getting back into the property market and talking to us about how we can help.

Apparently Australian property is over valued...so how do we stack up globally?

Most of you are hearing a range of people talk about Australian house prices being overvalued. To be honest, it is very hard to find reliable information to prove or disprove this theory. However, one report has just arrived that is very interesting.

One of the arguments put up by the "dooms-sayers" is that debt levels in Australia are unsustainable and that mortgage stress is at an all time high. This is highly simplistic as it does not take into account........

• Rising real wages,
• Low unemployment,
• Population growth
• Consistently low inflation and
• Conservative lending policies.

In world terms, Australian borrowers do not appear to be under any greater mortgage stress than most of our international counterparts. This is some achievement given our interest rates are high in comparison.

The attached link is to a report commissioned by the worlds biggest mortgage insurance company, Genworth Financial. Most of our financial institutions in Australia use Genworth to insure their loans. As this group operates in so many countries, they have access to unique and reliable data from across the globe. Specifically, this report compares mortgage data from: India, USA, UK, Australia, Italy, Mexico, Canada and Ireland.

Here are some of the highlights:

• 22% of respondents across eight countries struggled to meet their mortgage repayments over the past year
• 1/3 of all respondents felt positive about their national economy, with developing countries particularly optimistic
• 45% of all Australian homebuyers surveyed overpay their mortgage – the second highest across all countries surveyed
• One in five first homebuyers in the US, Canada, and Australia were already spending more than half their income on debt repayments
• 3/4 were concerned about their personal finances, with 46% of Italian respondents and 63% of Irish respondents the most concerned across all countries
• The average age of first homebuyers has been increasing in all countries except India
• 84% of Australians surveyed cited rising costs of living as the primary concern impacting their ability to repay their mortgages over the next 12 months.

The report is very interesting and gives a great world perspective, click here to view the full report...

Australian interest rates - the cash rate and competition

A good friend of mine, former interest rate trader and now Mortgage Adviser is probably the smartest bloke I know when it comes to financial translation - why; because he never purports to be an expert, but in the more than 20 years I have known him, he has been right most of the time about where interest rates are going as well as the direction of the AUD by simply, explaining the thinking behind his reasoning - the technicals are there but the focus (to me anyway) has always been on the fundamentals.

He sent me an email today on Australian Interest rates, I thought I should share it with you.  How many of us know how the cash rate works anyway?

Come the first Tuesday of every month the RBA board grabs the media spotlight with its cash rate decision.

"Up, down or hold" seems to have become part of the Aussie culture. I am pretty sure that a betting agency already entices punters on the subject.

So much is said about this decision but few people know what the cash rate is, or how it works.

I decided to make it my mission to make sure that all of my clients know how the cash rate impacts on them.

Most people have worked out that the banks will generally move their variable home loan rates in line with the RBA cash rate decision. However, since early 2008, Australian Lenders have lifted their home loan rates about 1.20% above the cash rate movements. A big departure from normal behaviour.

Essentially the cash rate (currently 4.75%) is the price at which financial institutions like banks, credit unions and building societies can buy/borrow money from each other in a virtual shopping centre called the short term money market.

The shopping centre landlord is the RBA. The RBA manipulates the price of money within this market place by injecting or withdrawing funds. Good old supply and demand.

So when the RBA decides that the new cash rate is 4.75%, they don't actually "set" the rate but they control the flow of cash in the virtual shopping centre to make the price of money roughly 4.75%.

To put this 4.75% cash rate into perspective, most lenders are now charging us around 7.00% for a variable home loan.

Interestingly, in Australia around half of the money that has been lent out to us mortgage holders has been sourced from a different shopping centre that is very generally known as the wholesale market.

The price of this wholesale money had been quite high until recently. This is the main reason why Australian lenders have increased their rates beyond the cash rate for the last two years.

The very good news for 2011 is that the cost of this wholesale funding is getting cheaper as the wholesale markets thaw out and realise what a solid market Australian mortgages represent.

Lower funding costs (and big profits) are enabling new lenders to enter the market (primarily via mortgage brokers) to undercut the existing lenders. As a result you will start to see a mortgage price war as the banks try to maintain their massive market share gains over the last two years.

Good news for mortgage holders and also good news for the property market generally.

Welcome to 2011, but please spare a thought - and a dollar; for Queensland and the flood victims...

For all of us, a new year holds a hope for a more healthy and prosperous year than the one we left behind.  We plan and give thought to the year ahead and the year we wish to have - openly, or privately; we list our hopes and dreams for the future, for ourselves and our families. 

For many sadly, the new year has brought tremendous pain, loss, grief and suffering on an unimaginable scale for most Australian's.  We are more used to seeing natural disasters away from our shores unfortunately, like with the Boxing Day fires, we are reminded that we are not immune from the will of nature. 

The floods in Queensland resulting from the sheer force of mother nature; reminds all of us of the fragility of life but also - if we look; she inspires us with the courage & strength embedded in all of us which shines when the chips are down.  The indomitable human spirit, compassion and generosity that is within all of us illuminates us all in a crisis.  We are reminded in these times what is really important - family, friends, community, love, empathy, selflessness and the basic needs of shelter, food and good health.

How easy is to forget to be grateful for what we already have and take life for granted.

We send our thoughts and prayers to all in Queensland and hope those of you who live there or have loved ones and friends affected by this disaster - that you and they; are all safe and stay hopeful and let faith lead you all into a brighter tomorrow.

We have donated $1000.00 to the relief and hope - if you haven't already; that you can give what ever you can, this is the most practical way we can all lend our support and send with it our blessings and hope and pray it finds those who need it - quickly!

We donated online. Please make a donation, no matter how big or small, by going to Queensland Government Flood Relief Appeal

And finally a blessing for 2011...

Our wish for all in 2011 is that peace may break into your house & thieves come and steal your debts, may the pockets of your trousers become a magnet for $100 notes, may love stick to you like glue, may laughter assault your lips, may your clothes smell of success, may happiness slap you across the face, may your tears be only of joy, may good health raid your body and mind like an elite force and take you hostage and may the problems you had - forget your home address.

We hope 2011 ultimately, fulfills all your hope and dreams.


Warm regards,


Rose & Jonesbut please spare a thought  - and a dollar; for Queensland and the floWelcome to 2011, but please spare a thought  - and a dollar; for Queensland and the flood victims...od victims...ctims...