Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory & buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

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Thursday, 15 November 2012

Two in three chance of interest rates hitting historic low of 3.00% on December 4

I quite possibly made a rash promise to not mention interest rates for a few weeks. Ahhhh, you see, the trouble is, I have an almost unfeasibly short attention span, and so alas I regret to inform that it was an empty promise.

Truth be told, variable rate mortgages make up such an overwhelming percentage of the Aussie lending market that it's impossible to provide any kind of meaningful comment on the state of our property markets without some kind of reference to the prevailing cash rate and the future direction thereof.

Even with the implied yield curve having seemingly been inverted forever-and-a day now (meaning that the futures markets are expecting interest rates to fall), only around 20% of new loans were fixed in rate as at Septmber of this year, so the Reserve Bank's interest rate policy is truly a key driver of market sentiment.

3.00% here we come?

Sliding share markets and moderating inflation/growth expectations have led to a slightly weaker dollar at 103.5 cents, and a 62% chance of rates again hitting the historic low of just 3% on December 2.

How is that 62% calculated?

"The expectation of a rate change by the RBA is calculated by taking into account the number of days the RBA Target Cash Rate is known versus the number of days in the month that it is unknown ie: the number of days before and after the RBA Board Meeting.

By incorporating this time factor into a probability equation the following formula can be used to determine current market expectations on whether or not the RBA will change the Target Cash Rate."

Effect on property markets

What does all this mean for property prices? Well, we saw what happened last time interest rates hit 3.00% (chk-chk boom) so it's hard to imagine that a 3% cash rate wouldn't ignite growth in those land-locked property markets where vacancy rates are already very low.

There's something of an interesting sub-plot here and that is that although the banks have made a big show of not passing on previous rate cuts in full to borrowers (ostensibly only around 115 basis points of the 150 bps delivered by the Reserve Bank), digging  beneath what is trumpeted forth to the media, banks have been competing for business on other mortgage products.

Therefore property buyers who shop around outside of the standard variable rates on offer at the major banks (6.58% to 6.71% from memory) can obtain some fabulous deals.

Although I place very little reliance on month-to-month data, I'd expect to see some moderate price growth continuing through until Xmas, particularly in those aforementioned markets with low rates of vacancy as the impact of the previously delivered rate cuts flow through.


Do you really care about the geeky stuff? I sense not. And of the tremendous advantages of writing a Blog over providing content for the financial press is that can write about whatever I feel like. 

Anyhoo, here's how we know that there is a 62% chance of a December rate cut:

rt * n b + {r(t + 1) p + rt(1 - p)} * na = X

So P is the probability of interest rates changing (solved in the above equation as 62%) and:

X = current yield on 30 Day Interbank Cash Rate Futures - currently trading at 96.88 (suggesting a rate cut to 3.00% is more likely than not).

rt = current known Target Cash Rate (3.25%)
r(t + 1) = expected new Target Cash Rate (3.00%)

nb = fraction of month where target rate is known (ie: before RBA official rate announcement), which is 19/30 for December 2012 as the next meeting is December 4.

na = fraction of month where target rate is unknown (ie: after RBA official rate announcement), which is 9/30 as the last meeting was November 6.

Solve the equation for P and you come up with 62%. Ohhh, you've stopped listening?

Well, there you are, next time you're down the boozer and racking your brains for a conversation-starter...