"The notion that when interest rates increase it will be doomsday is hilarious. Most people are already fixing their facilities, furthermore all loans have been stress tested with at least a 2% margin.
We won't see interest rates in the 7s for a long time."
Kingcarmelo
Have you actually looked a long term chart of interest rates?
If you had you would know how ridiculous a "stress" test with a 2% margin is.
Over the course of a 30yr loan how many interest rate variables are there?
Lets narrow it down to the potential risk in the first 10yrs to make it easier for you.
Look at what history tells us can happen to interest rates in a rising interest rate cycle like the one coming when the FED and bank of Japan stop their combined 180 BILLION per month QE.
I will use the US fed fund rate as an example.
18/6/1967 low of 4% rising to a 29/6/69 high of 10.5%
2 yrs into the loan a rise of 6.5%
2/1/72 low of 3% rising to a 14/7/74 high of 13.93%
2 yrs into the loan a rise of almost 11%
26/12/76 low of 4.54% and by the early months of 1980 interest rates were around 20%, leading to a 16% rise over 4 yrs!
Now you say we wont see interest rates in the 7s for a long time.
Based on what?
Do you know for a fact that the 180 billion per month of QE will continue for a long time?
Is it worth the risk for a Sydney investor to borrow millions for a decent piece of property and rely on a 2% stress test? I think that's insane based on historic interest rate possibilities.
When the US FED does taper eventually we shall see how these so called "stress" tests work out.
If you say interest rates cant rise like they did in the 60s and 70s then you are saying "this time is different", and we all know how that turns out in financial markets.
But for a moment lets assume you turn out to be right about not having interest rates in the 7s for a long time in Australia, then the current bubble is nothing compared to what is coming, and then it will be harder and harder to prevent a collapse.
A collapse is preventable now, but speculative money if flying into properties in Sydney, and sustained low interest rates is only going to fuel it futher.
Even another 3-4yrs of low interest rates may see properties in Sydney rise another 50-100%, and the median price will be 2 million in no time for many average suburbs.
Kingcarmelo you may work for a bank and know a lot about banking, but that does not mean that you know a lot about interest rate movements.
There are countries that have negative interest rates on their bonds and then you have countries like india with interest rates around 9%.
The disparity is massive and this will futher de stabilise the international interest rate market relationships.
HOW CAN ANYONE POSSIBLY PREDICT INTEREST RATES IN THE NEXT 10YRS???
There is NO HISTORIC FINANCIAL TEMPLATE OR MODEL for what will unfold and pretending that you can predict such stability in interest rates is delusional.
If people want to try their LUCK wading through the coming interest rate environment with big debts that's up to them, but any success will be the result of luck and not skill, because skill in financial markets is based on using effective modelling to predict and control risk, and as I have pointed out there is no risk model for the mess the world is in, just more and more people playing with derivatives as a stop gap solution to hedging and insuring agains their losses.
Guess which part of the derivative market is the biggest by far????
Interest rates swaps.
A much bigger market than the derivatives involved in the GFC.
I think your post is hilarious.
Perhaps, if we join some dots and think outside the box, managing this interest rate risk might be part of the reason the FED and BOJ are trying their best to stabilise interest rate markets?
http://en.wikipedia.org/wiki/Interest_rate_swap
a few quotes from Wikipedia on IRS
"An interest rate swap (IRS) is a popular and highly liquid financial derivative instrument in which two parties agree to exchange interest rate cash flows, based on a specified notional amount from a fixed rate to a floating rate (or vice versa) or from one floating rate to another.[1] Interest rate swaps are commonly used for both hedging and speculating"
"The Bank for International Settlements reports that interest rate swaps are the largest component of the global OTC derivative market. The notional amount outstanding as of June 2009 in OTC interest rate swaps was $342 trillion, up from $310 trillion in Dec 2007. The gross market value was $13.9 trillion in June 2009, up from $6.2 trillion in Dec 2007."
