Oct 03

Bond Yields – Rate Rise now a near Certainty

As mentioned around a month ago after the month of August a rate rise from the Reserve Bank appeared a long way away but September has certainly been a month for the risk takers. Aussie Dollar near record highs and the sharemarkets are up so of course that means government bonds are down. The above chart shows that 1 month and 3 month Australian Government Treasury Notes are trading around 4.85% and with cash rates at 4.5% that can only suggest the market believes a rate increase to 4.75% is odds on.

This will obviously have consequences that will hit home loans the most. Personally I cannot remember a time when there has been so much talk about how expensive house prices are in Australia. We’ve had Jeremy Grantham (the G in GMO) saying if our housing bubble doesn’t burst it would be the only asset bubble in history not to do so; Steve Kean walk to Mt Kosciusko because he expected property prices to decline massively by now; the Commonwealth Bank is spruiking around the world with dodgy figures suggesting our house prices are ok;  and Goldman Sachs economist, Tim Toohey, has said our prices are overvalued by something like up to 35%.

I don’t believe this rate rise will send our home prices off the cliff, but there is no doubt to me they are likely to be going nowhere over the next few years. There does appear to be an Australian psychology that we are different and our house prices won’t fall but the warning in that is that is always the psychology before a massive fall…we obviously have many very recent examples to call upon to support that statement.

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