Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), & CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

5 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's one of the finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete 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 & charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, author of the New York Times bestsellers 'End Game' & 'Code Red'.

"The level of detail in Pete's work is superlative across all of Australia's housing markets" - Grant Williams, co-founder RealVision - where world class experts share their thoughts on economics & finance - author of Things That Make You Go Hmmm, one of the world's most popular & widely-read financial publications.

"Wargent is a bald-faced realty foghorn" - David Llewellyn-Smith, 'MacroBusiness'.

Monday, 2 January 2017

Easy, tiger

Narrative change

A couple of things happened in 2016 that changed the outlook for interest rates in Australia. 

Swaps had been seeking out lower and lower rates, yet fairly abruptly around September time someone or something called time on that particular party.

Well, what happened?

It wasn't that the economy suddenly became stronger. Hardly! 

In fact, GDP growth was actually negative for the third quarter of the calendar year, while employment growth went backwards in the months of both August and September too.

And all measures of inflation are actually below the target 2 to 3 per cent range.

Then, what? 

Change of Governor

While we should be wary of imposing simplistic narratives over historical trends (with hindsight giving the supposed benefit of 20/20 vision), it appears that the change in Reserve Bank Governor may have been a factor.

During the month of September, Philip Lowe began suggested that interest rate cuts are losing their power, and seemed to infer that further cuts would only be delivered reluctantly, if at all.

From the first meeting he chaired in the first week of October, the wording of the Monetary Policy Statement concluded that policy was consistent with growth and inflation returning to target over time. 

Since the day of that October meeting, 6-month OIS rates have trended only in an hawkish direction, from 1.42 per cent back up to 1.50 per cent.

The Reserve Bank of Australia now has a duty to "keep consumer price inflation in the economy to 2 to 3 per cent, on average, over the medium term", apparently implying no immediate need to cut rates.

Trump bump

The other significant event in 2016 was Donald Trump's election victory in the US, which promptly changed the inflation outlook.

Australia's bond yields had already starting ticking back up before Trump's election triumph, with the yield on government bonds with a 10-year maturity recovering from a low of just 1.83 per cent in August to 2.31 per cent.

But then, after an initial post-election blip, the 10-year bond yield increased sharply to 2.87 per cent, before settling down a bit to finish the year at 2.78 per cent.

Easy, tiger!

Through November the indicative standard variable rate (SVR) for owner-occupier mortgages was 5.25 per cent, although of course by shopping around you can get much better deals than this (the indicative discounted rate was reported at 4.50 per cent, for example). 

The reported 3-year fixed rates for both owner-occupiers and investors were lower again at 4.10 per cent and 4.25 per cent respectively. 

While some borrowers have been able to obtain much better rates than these, the key point of note is that mortgage rates may rise in 2017. 

The next inflation print on January 25 will be as important as always, and there may or may not be further cuts in the cash rate to come (quite possible, don't bank on it).

Overall, though, the message is clear: think carefully about what life would be like if your mortgage rate had a 6 or even a 7 handle, and above all don't borrow more than you can comfortably afford to repay in these scenarios.