The 90-day and 5-year swap rates are both around 1.5%, 9-year lows. Significance?
We all knew that interest rates would not stay low forever, and we’re now seeing the first signs that the downward trend is being broken. It’s public knowledge that the banks have been selectively raising rates. Recent evidence is Westpac and its related banks raising rates for interest only loans by 0.08%. And, only yesterday, my bank notified me of an increase in my line of credit of 0.15%.
What is not widely known is that since early October, the five-year swap rate (in red) has moved sharply higher, as shown in the chart below. For those of you with variable rate loans, I suggest that now is the time to fix some or all of your debt.
When my clients ask about the potential for a substantial drop in prices for residential real estate in Sydney, I’ve often referred to the consistent message from the major banks’ economists and others. That is that supply and demand are pretty much in balance in all capital cities except Sydney, where we have a gross under-supply that is likely to persist well into next year.
I now have reasons to question this position. Bank economists are very unlikely to ‘talk down’ the market, because 60% of their balance sheets are bricks and mortar. And, in my previous post, I included graphs provided by Stockland, who also have vested interest in the rising market. The other reason is that property monitoring experts are projecting a glut of units due to the many high-rise developments now under construction. They do, however, also project a continuing under-supply in standalone housing.
P.S. I noticed that the 5-year swap rate increased by a much wider margin than in the past. On Friday, the 30th, it was 1.87%, and on Friday, the 7th, it was 2.01%. Could this be a turning point?
Friends, clients, and prospects often ask if we’re nearing or at the top of this cycle in the residential property market. My replies have been consistently the same – probably not. Bank economists over the last 12-18 months have stated that the Sydney market is grossly under-supplied and will likely remain so well into 2017. So, prices continue to rise, aided in part by the six-year plus downward trend in interest rates.
An article in the weekend Fin Rev provides further evidence, the most interesting part being the graphs based on data from Stockland. If they’re anything close to accurate, those who want to buy but think that prices will fall in the next year or two, may experience an expensive regret.
I had to add range on the vertical scale of my chart below, because for the first time, one of the rates that I follow closed the week below 2%. That’s the five-year swap rate, which is a pretty good guide for Medical Equipment Finance, most of which is based on five-year terms. If we assume that lenders need 2-3% margin for risk and profit, that means five-year rates should be 4-5%, the lowest yet.
So, if you can bring forward plans to replace or add revenue-generating equipment, you’ll get the lowest rate in a very long time.
The chart above represents over five years of the four interest rates that I record weekly. As stated in previous blogs, the 5-year swap rate (in red) is the most interesting, because it is a pretty good indicator of what rate to expect for Medical Equipment and other finance. The swap rate last Friday was 2.54%, to which we add at least 2% for margin and risk, resulting in rates to my clients in the mid to high 4s.
My analysis of the trend remains down, because we continue to record lower lows and lower highs. But, if you need to invest in income-producing equipment, now would be a good time to lock in a really low 5-year rate. You may also want to consider bringing forward planned investments, such as equipment replacement or major upgrades.
As you’ll see below, the trends remain downward, except the five-year swap rate (the red line), which has gone up since hitting a low of 2.28% in early April. But, it’s only up by 40 points. The big question on the minds of many is, “Are we seeing or have we seen the bottom of this cycle?”.
As an avid chartist, my read is that until we see a break in the cycle of lower highs and lower lows in the long-term trend, it’s still a down market for interest rates. For those interested in Medical Equipment Finance, the five-year swap rate is the most relevant, and it would have to break ‘resistance’ in the high-threes to signal a reversal of the trend.
You may recall from a previous post that lenders apply a margin/risk uplift of about 2% to the swap rate, making the current five-year rates to creditworthy Healthcare and other businesses in the high-fours.
I’ve been recording certain interest rates on a weekly basis for several years, and it’s interesting to note that, for the first time in decades, the five-year swap rate fell to under 3%. (For the uninitiated, the swap rate is the rate at which banks will lend to each other.)
The significance for those who need Medical Equipment Finance or any other form of Asset Finance is that you should be able to secure a five-year loan at close to 5% (assuming that lenders need ~200 basis points for margin and risk).
Also for the first time, the best three-year and five-year term deposits are in ‘lock-step’ at 4.2%.