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Why the futures markets are probably wrong about interest rates

Speculation about what’s going to happen to interest rates is rife at present.

On Thursday, the markets predicted a 70% chance of an interest rate cut to 3.25%.

Naturally, as an investor in equities and property, I’ll openly admit that I intuitively hope for that outcome. And several chief economists are now on that bandwagon, including Evans of Westpac.

I just can’t see it. One small part of my reasoning is that house prices are on the increase and the Reserve Bank will not be keen to fuel that particular fire.

It’s painful to read sometimes all of the comments online about plummeting dwelling values. Where exactly is this happening? Please explain.My thoughts as ever remain the same: if prices really are tanking, could someone please point me in the direction of all these fabulous bargains so I can buy properties when Australia is ‘on sale’? The fact is that prices in most areas worthy of investment have not fallen in value very far at all (and in some cases – ‘at all’).

Brisbane? Possibly, yes, prices have come off a  little there, the flooding in that city being one factor. But in most capital cities, prices have remained steadfastly strong.

A huge disclaimer here:

The biggest red flag in finance and investment might be when someone says “it is different here!” or that “it is different this time!” – but it does seem to me that the inner/middle suburbs of the capital cities in Australia are markedly different from, say, rural England, Ireland or more speculative markets such as Tampa in Florida.

I’ll agree with the housing bears that buying properties in remote locations can be risky .

But then, hasn’t that always been true? Buy a commodity which has variable demand and you introduce risk to the equation.

Property investors in Australia – in my opinion – would be wise to seek out suburbs where there is limited land available for release but a growing population, fuelling demand.

Amusing: Chris Joye’s Friday night post  below shows house prices have been rising int he month of September.

I’ve also screen-grabbed the ASX target rate tracker which shows the futures markets and the percentage likelihood of interest rates being cut at the next board meeting.

I don’t like sticking my neck on the line, but I find it hard to believe that the RBA will cut interest rates in October.

November just feels right to me, in part due the next round of inflation data being due in the second half of October.

Of course, I look forward to your emails when I’m proven to be completely wrong – it has been known on occasion!

House prices

interest rates



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About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


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