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Interest rates into 2015 and beyond – a brief glimpse of what’s to come

Media commentary has been bursting at the seams with hype around interest rates and investors taking advantage of consistently cheaper credit opportunities to snap up residential real estate, right throughout 2014.

In fact, so much talk has gone on that I think as we bring this year to a close and ring in 2015, we could all use a break from the bombardment. But in my line of work it would be remiss of me to not attempt some kind of forecast, so let’s make this one short and sweet.

Not much change in the wind

Recently, a chief economist from a lender called Latrobe made a very bullish prediction, announcing that he doesn’t expect interest rates to move outside plus or minus 0.5% over the next ten years.

Not surprisingly, he’s been the only analyst to make such a long term forecast, but then again Bill Evans from Westpac was also the only economist to predict that rates would fall so significantly a few years ago; it only takes one correct opinion to be right.

Now I don’t know if I agree with our friend from Latrobe, because who really knows for sure what’s going to happen in 5 or 6 years from now, let alone ten years down the track? But I would not at all be astonished if we were having this same discussion in 12 months, with both fixed and variable interest rates not that materially different to what they are today.

Reasons to remain on hold

During the GFC, Australia’s economy was insulated largely by the mining boom and raw material prices. However as the resource sector continues to cool, balancing our financial fortunes has become increasingly problematic for the Reserve Bank, which has demonstrated that it’s looking at other means to control sectors of the market.

The only reason the RBA would increase rates across 2015 is if they thought consumer confidence and the economic growth rate was a lot healthier than it is today, and while that’s of course possible, it’s probably unlikely to occur in the next 12 months.

The other determiner for rate shifts will of course be the property markets and general regulator unwillingness to allow housing prices to veer out of control.

But as discussed in our article regarding regulator rhetoric, I think the central bank will continue using other metrics and mechanics to try to control that.

For now, it’s relatively safe to argue that the Australian economy’s risk is probably to the downside rather than the upside. In other words, it will become more subdued rather than strengthening as we enter 2015. And if that’s the case, then interest rates probably aren’t likely to move very much.

However, I don’t think they’re likely to drop significantly either. Rates are already at an all time low and at a certain point, if you drop them further, they start to become a blunt instrument because you’ve already lightened the burden of debt. Essentially, whether you’re paying 1.5% or 2% will probably not change consumer confidence in any meaningful way.

So for all of the above reasons, I don’t think interest rates will move much at all over the next twelve months.

A weaker economy and lower confidence is not all bad news. I’ll remind you of one of Warren Buffett’s quotes: “Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.”

For more information on how you can profit from investing in Australia’s residential real estate sector by establishing clear investment goals and strategies, click here to contact us, or subscribe to receive regular post updates and industry insights.

Stuart Wemyss is a chartered accountant and founder of Property Tycoon Finance. Email: wealth@propertytycoonfinance.com.au

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