FatCat's MoneyConfessions - helping you save (& make) money, one click at a time
ZERO PERCENT rates by 2010 forecasts economist: Variable versus fixed rates
A Sydney economist predicts that the Reserve Bank rate will be 2% by the end of 2009 and zero by 2010.
Steve Keen, University of Western Sydney’s associate professor of economics and finance maintains that the RBA’s concerns about high household debt levels will increasingly take priority over inflation, as deep rate cuts in 2009 fail to stimulate the economy.
''The debt bubble is bursting and when it bursts, people stop spending and borrowing,'' he said.
Keen’s announcement coincides with a warning issued by one of Australia’s largest independent mortgage brokers, Loan Market Group, who says more than 100,000 mortgage holders are missing out on the benefits of falling interest rates after locking into fixed rates of more than 8% over the past 12 months.
Latest figures from the Australian Bureau of Statistics show fixed rates of two years or longer were taken out on 126,054 dwellings in the 12 months to August, 2008.
Chief Executive of Loan Market Group, Jennifer Nielsen, advises mortgage holders to steer clear of fixed interest rates for the time being despite some substantial price reductions by the major banks.
“Fixed rates are great when you hit the bottom of the interest rate cycle but most analysts are saying that we aren't even close to this point,” she said.
Variable-rate loans track movements in the official cash rate, as set by the RBA. If the official cash rate goes up so does the interest rate on your loan, along with your repayments. Conversely if the RBA cuts rates your financial institution will correspondingly drop interest rates by at least a percentage of the central bank cut.
With fixed-rate loans, you lock into a term of usually one, three or five years over which the interest rate will remain the same. This works well when the expectation is that interest rates are going to rise or because you need some certainty about your repayments. The downside is that if rates fall, you'll miss out on the lower rate.
Professor Keen told Monday Confessions that when he made this forecast last month he was being conservative.
Steve Keen, University of Western Sydney’s associate professor of economics and finance maintains that the RBA’s concerns about high household debt levels will increasingly take priority over inflation, as deep rate cuts in 2009 fail to stimulate the economy.
''The debt bubble is bursting and when it bursts, people stop spending and borrowing,'' he said.
Keen’s announcement coincides with a warning issued by one of Australia’s largest independent mortgage brokers, Loan Market Group, who says more than 100,000 mortgage holders are missing out on the benefits of falling interest rates after locking into fixed rates of more than 8% over the past 12 months.
Latest figures from the Australian Bureau of Statistics show fixed rates of two years or longer were taken out on 126,054 dwellings in the 12 months to August, 2008.
Chief Executive of Loan Market Group, Jennifer Nielsen, advises mortgage holders to steer clear of fixed interest rates for the time being despite some substantial price reductions by the major banks.
“Fixed rates are great when you hit the bottom of the interest rate cycle but most analysts are saying that we aren't even close to this point,” she said.
Variable-rate loans track movements in the official cash rate, as set by the RBA. If the official cash rate goes up so does the interest rate on your loan, along with your repayments. Conversely if the RBA cuts rates your financial institution will correspondingly drop interest rates by at least a percentage of the central bank cut.
With fixed-rate loans, you lock into a term of usually one, three or five years over which the interest rate will remain the same. This works well when the expectation is that interest rates are going to rise or because you need some certainty about your repayments. The downside is that if rates fall, you'll miss out on the lower rate.
Professor Keen told Monday Confessions that when he made this forecast last month he was being conservative.
Replies to This Discussion
-
Permalink Reply by Natalie Bochenski on -
I heard a UK economist recently saying the same thing was likely to happen over there.
With their rates slashed to 3% just last week, they're closer to it than us.
I didn't think such a thing was possible; but I guess if you'd asked me what I thought the floor was on interest rates I wouldn't have been able to give an answer.
I've got a variable home loan; after two years of rises, it looks like the sucker is finally starting to pay off! :)
-
Permalink Reply by jacquesk on -
I am not sure if 0%. The only other country I know of in my admittedly limited experience to go to 0% was Japan and it certainly was their best time economically.
-
Permalink Reply by JeffK on -
I'm reading a good book at the moment called Freakonomics - worth picking up as it's a book that will change the way you think and what you believe - and in it the author mentions how "experts" tend to overstate their case because if they don't then they're not heard. "Interest rates to fall further" won't get nearly as much attention as "Interest rates to go to 0%".
He uses an example of women's groups overstating the % of women who are victims of sexual assault, using the figure 30% when it is more like 12%. He outlines that no one in their right mind is going to question the figure of 30%, arguing that the women's groups know the figure is incorrect (based on statistics readily available to everyone). They also know that not only will it not be challenged, but also a higher figure is likely to get more attention, and therefore help them fight the issue at hand. With so much noise in the media, you have to be extreme to be heard.
This doesn't mean that rates can't go to 0% (or close to it). But given there is no precedent in Australia, it seems highly unlikely.
-
Permalink Reply by Natalie Bochenski on
-
JeffK - totally agree with your assessment of Freakonomics - a great read!
About
VOTE NOW
Latest Activity
Hi all,I am after some advice and ideas from everyone, professional advice thus far has been to declare bankrupt and get it over and done with.
This is my situation, I used to own a company that T/O was around $1M p/a. The business had a bad season…
Be aware that Fox Symes is more of a credit management company and might not be what you need. I would talk to the lease company first, explain your circumstances and try to renogotiate the lease terms, eg extending the term to make payments less...…
The Shire of Litchfield had a problem collecting about $250,000 from unimproved land holdings which were unmaintained and basically had no active ownership. This properties known as "dead man" leases were owned by estates that acquired them in the 1…
You should email this to Get-Up
Ever read "The richest man in Babylon"? Its got the most straight forward financial plan that applies to anyone.
In fact you can buy a series of books revealing Buffetts strategy. The ones I prefer are any authored by Mary Buffett but there are others as well
We'd love any advice or opinions on the following;
We've got 3 properties (2 investment properties and 1 principle residence). We lived in our principle residence for 2 years and have been renting it out for the past 5.5 years, the property is va…
Message to billionaire Aussie John from inside a rat infested squalid Indonesian jail. From Robert McNeice. John I am sorry I did not pay back your money but please I have suffered enough. I need your help to me get out of here, my health is not…
FatCat news
Home-Equity Loans
A home-equity loan, also known as a line of credit, lets homeowners borrow money by leveraging the equity in their homes.Bill Gates No Longer World's Richest Man
For the third time in three years, the world has a new richest man.Eddy Groves' yacht, chopper to be sold
A helicopter and yacht on which fallen childcare entrepreneur Eddy Groves defaulted mortgage repayments are likely to be sold after approval was granted by the Federal Court.Billionaire Truck Driver Lindsay Fox
The global economic downturn was bad news for most businesses but not for the one belonging to Australian trucking billionaire Lindsay Fox.Andrew Forrest tops Aussie rich list
Iron ore magnate Andrew Forrest has more than doubled his wealth to reclaim the title of the nation's richest person from gaming tycoon James Packer, according to the latest Australia Rich list published by Forbes Asia.Australia's 40 Richest
An Australian could have stood pat in the 10 months since Forbes Asia last ranked the country's 40 wealthiest people and still would have been one-fifth richer by our count. The Aussie dollar gained 21% against the U.S. greenback, our benchmark.Industry super members better off
People who invest their super in industry funds are almost $80,000 better off than retail consumers$1 Million: Does It Still Mean You're Rich?
Becoming a millionaire used to mean you were on top of the world. Nowadays, it means you are climbing up the ladder.Billionaire Predictions 2010
Even as most billionaires saw their wealth increase in 2009 along with rising stock markets, some remain cautious and believe that 2010 will continue to test the global economy.Why Retirement Could Be Bad For You
You cannot imagine how many times I've heard business builders lament: By the time I'm able to smell the roses, I'll be too old to walk through the garden!© 2010 Created by FatCat on Ning. Create a Ning Network!
