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It was almost like you went to put the kettle on during the ad break and everything changed with the Australian Dollar: one minute we’re pushing (almost) the 1 AUD for 1 USD and within a few months the AUD is struggling to buy 60 cents US.
Not being an economist, and learning on the run as no doubt many of us are in these historical economic times, I put this question to a friend of mine that I’ve grown up with that now works in the City of London. He’s a bit of a whizz and obviously a busy man, so I really appreciated his answers in layman’s terms, and am glad he’s allowed me to share them with you. Here’s his explanation:
The USD is benefiting from several themes, I will list them:
1) There is a perception that the US is further down the road in this crisis (ie. real estate markets have fallen more dramatically) and they have unveiled a more comprehensive suite of policy measures to deal with their problems than other countries have thus far needed to, Australia included. This has enhanced the USD status as a “safe haven” currency. There is the perception that the rest of the world is now slowing down faster than the US, and so this is encouraging US investors to repatriate foreign investments into USD.
2) Central banks around the world are cutting rates aggressively, and so the interest rate differential between other currencies and USD is narrowing, this increases the relative attractiveness of the USD.
3) The unwinding of “carry” trades (this is where credit is borrowed from central banks with low interest rates and invested in other economies that are higher). Over the past year/18months some investors have borrowed in USD at low interest rates, to invest in AUD at higher rates, and so earning the 4% or 5% interest differential between the two currencies. This money flow was one of the reasons behind a 30% increase in the AUD vs the USD over this period. As volatility in financial markets increased, these investors have unwound these trades and subsequently sold AUD to buy USD.
4) The linkage of the AUD to commodities has not helped it in recent weeks, as all commodities have sold off on expectation of a rapidly slowing economy.
So there you go. Economies are ultimately a huge web of tangled and complicated interests, involve complex strategies and vary in their proclivity to risk. We clearly can’t be expected to understand every single facet with great understanding, particularly when many of the best brains in the world couldn’t.
I do hope, however, we’ve given you a few little tips that mean your “flapping in the wind” a little less. And of course, there’s certainly a need in the world for Wise Guys!
The Reserve Bank of Australia’s (RBA) decisions to decrease interest rates over the last few months were welcomed by borrowers and lenders alike, most recently with the 0.75% cut in October and the 1% cut in September.
The reality is, however, that most of Australia’s lending institutions have chosen not to pass on the full cuts, citing the increases in their funding costs.
This has left a gap between the fall in official interest rates and the rate reductions for a standard variable mortgage by most banks. The banks obviously have responsibilities to their shareholders, but the simple fact is that the RBA did not make these cuts out of a flight of fancy. The cuts were made with the intent that the banks would pass on the full rate decrease.
As the Acting President of the Real Estate Institute of Australia (REIA), Chris Fitzpatrick recently stated:
‘The banks really need to think about their corporate responsibility to their customers and pass the entire rate cut to where it is needed and where the RBA have intended the cuts to go, the people. The RBA does not cut interest rates without reason, they are doing what they see fit to take the financial pressure off households around Australia and to stabilize the economy while keeping inflation in check.’
Obviously, the increase in the banks “bad debts” have not helped, with exposure to companies such as the Lehman Brothers, Allco Finance Group, ABC Learning weighing them down. Bloomberg report that Bad debts jumped to A$930 million in fiscal 2008 from A$496 million a year earlier. Bad debts as a proportion of loans increased to 0.26 percent from 0.14 percent a year ago. Australian banks have investments totaling A$7.4 billion in troubled companies and it is predicted that Australia’s four biggest banks will record about A$7 billion in bad debts this year.
Quite simply, however, it is in the long-term interests of lending institutions that homeownership is affordable and an attractive investment option. The will have a positive effect on the overall Australian economy, which is something that right now is what everyone is looking for. Simon Turner
Continued: Part 2 of a 2 Part Report
The massive decrease in housing sales volumes has decimated State Government budgets as they lose hundreds of millions of dollars in would be stamp duty revenue. The flow on effect through to builders, other trades people, real estate agents and so many others throughout the economy is in the billions of dollars – so why the inflation obsession and the foresight of a child?.
For the last 5 years monetary policy and fiscal policy in Australia have been in conflict The RBA had been trying unsuccessfully to slow the economy by increasing interest rates to breaking point while the government led by Prime Minister John Howard was happily cutting taxes and increasing spending. This is a blatant example of the many problems of an independent central bank – I am not a huge fan of either model as both have major drawbacks – the topic is worth discussion.
The interest rate increases in February and March, which were undertaken in response to what looked like irresponsible election promises by Labor Prime Minister, Kevin Rudd were really the last straw as the Reserve Bank Directors continued to increase rates to fight their own war against the ever spending politicians, instead of looking ahead to the coming war against recession. In other words the Australian public was forgotten about – totally unacceptable and completely destructive. Should we still have an independent Central Bank? Certainly worth debating!
As this week unfolded – The Melbourne Cup which stopped the nation, the US Elections which stopped the world and bad economic news all round, no more thought was given as people escaped their problems, dressed up and went to the races in an attempt to forget the economic mess that is unfolding. Our Banks seem to be ok – but the RBA and its obsession with inflation over economic growth have made the situation difficult when it need not have been.
Yesterday (Tuesday) the daily barrage of doom and gloom outdid itself, with the actual release of statistics from the Australian Bureau of Statistics (ABS) – retail sales, performance of manufacturing index, job advertisements, house prices, inflation gauge – all down – A LOT!
We at Marquette Turner Luxury Homes see that our role is to lobby hard for change and to keep all of our clients, family and friends informed of every issue that may affect them. It just isn’t good enough to sit on the fence and play it safe.
A dear friend once said “to have no opinion is similar to having a lobotomy”.
FYI: read Part 2
The Reserve Bank of Australia (RBA) has cut its key interest rate for the third month in a row as it attempts to prevent Australia’s economy stalling. The central bank trimmed three-quarters of a percentage point – or 75 basis points – off its key cash rate, reducing it to 5.25%, the lowest level since December 2003.
For a typical 25-year, $250,000 home loan, today’s cut if passed on in full by lenders will save the borrower $112.63 a month in payments or some $33,791 over the life of the loan.The move, announced after today’s monthly board meeting by the RBA, exceeded economists’ predictions of a 50 basis-points cut. Today’s cut brings the RBA’s cuts to 2 percentage points since the central bank reversed course in September, retreating from a 12-year high rate of 7.25%.
The RBA will be hoping that the big commercial banks will repeat last month’s feat of passing on the entire official rate cut to borrowers. Lower lending costs help spur the economy by encouraging more individuals and businesses to purchase houses or make other investments, stoking demand that in turn prompts more orders.
Almost all the latest economic figures point to a sharp slowdown in demand as the effects of the global financial crisis spread to Australia. Falling commodity prices are already dimming the outlook for the mining and export sectors. Retail sales shrank 1.1% last month from September, the largest drop since April 2005, as consumers start to pull back on spending.
House prices, another measure of the economy’s health, fell 1.8% in the September quarter, the sharpest slowdown since the 1970s, according to some reports.
Housing is becoming more and more attractive as an asset class as the year progresses. Opportunistic investors are in for a feast – especially those from abroad in countries with exchange rate advantages (United States, United Kingdom and the countries of the European Union using the Euro) – exciting times!
Michael Marquette: In what can only be described as a momentus day for Australian real estate, most of the country’s largest lenders have already chosen to pass on the majority of the 1% interest rate cut to borrowers.
The Commonwealth Bank, National Australia Bank and Westpac have reduced their variable rate by 0.8% of the full 1% and Aussie Home Loans signaling that it will pass on a 0.75% reduction, this is the stimulation that the Australian property marketed needed. Therefore, we welcome this fantastic news.
With Treasurer Wayne Swan demanding that Banks pass on the rate cut in full once prevailing conditions allow the magnitude of the cut cannot be understated.
It is clear that the United States, Japan and the European Union are staring down the barrel of recession and the bold move by the Reserve Bank is aimed at doing everything possible to avoid recession in Australia.
With the price of oil plummeting in line with fears of a global recession, inflationary pressures which have existed in the economy are reducing.
With the largest interest rate cut since 1992 and confidence in the stock market eroded, real estate is well placed to benefit as the chosen investment strategy for many. Falling interest rates, increased rental yields, scarcity of housing and the poor performance of the stock market are all positive indicators for property owners and investors.
I believe there will be an increase in the number of self managed super funds (SMSF) set up to invest in property. Many people are concerned and frustrated that so much money has been lost by funds and are determined to be able to exert influence in investing money in the future. This will certainly assist demand in all real estate sectors. Australian property is well placed to do well in spite of prevailing world conditions.
Finally the pressures upon Australians will be eased and we have a reason to look positively at the property market in 2008.
As commented yesterday by Simon Turner in his Word on the Street article, The Reserve Bank of Australia at 2.30pm today announced that they would cut interest rates by 0.25% (25 basis points). Their long term view is that inflation will be under control and within its target area by 2010, meaning that the likelihood of a further 0.25% cut next month is good.
The Governor of the Reserve Bank believes that the previous tightening of monetary policy has exerted appropriate pressure on demand and the bank believes that inflation will drop below 3 % by 2010. This bodes very well for those looking to buy and sell property and is the start of what I believe to be a series of interest rates cuts over the next 2 years.
If the banks pass on the interest rate cuts there will be an enormous increase in consumer confidence. Given that long term rates have already been cut by many lenders the news for property is all good.
The Reserve Bank of Australia will hold what could be a historic meeting tomorrow, Tuesday 2 September 2008. Should they decide to lower interest rates, it will be the first time in seven years that the cash rate has fallen after 12 successive rate rises.
Most economists are suggesting there will be a cut by 25 basis points, however, the most bullish are even suggesting 50 basis points for the current cash rate of 7.25%.
The Convenient Truth
So why is this? Without getting too analytical, there are many factors that are leading to such a situation:
The Australian economy is slowing
Current business conditions are tightening
Credit markets are being squeezed
Inflation pressures are easing
Global conditions have snuck up upon the Australian economy probably a little more readily than the RBA expected, which will allow it to loosen its grip on monetary policy somewhat: cutting interest rates therefore mitigates the impact of a deteriorating global economy.
Compared to the previous year, building approvals fell 1.6% in February, despite an 8.7% rise in the number of private dwellings approved. The big driver was a very sharp 19.4% slump in private sector other dwellings, flats, units and townhouses.
The Australian Bureau of Statistics (ABS) said the seasonally adjusted estimate for private sector houses approved rose 0.8% in February following a rise of 2.4% in January; and the seasonally adjusted estimate for private sector other dwellings approved fell 0.9%.
In numerical terms, approvals to build private houses rose 0.8% to 9,138 in February and approvals for apartments and renovations declined 0.9% to 3,611.
The Housing Industry Association said approvals were heading in the wrong direction:
“Total building approvals were flat in February (up by all of 0.1 per cent) to be at a level 1.6 per cent lower than a year earlier. Multi-unit approvals fell by 1.3 per cent to 3,814, their lowest level since May last year. Approvals for detached houses inched up by 0.8 per cent to a level of 9,332,” HIA Chief Economist, Harley Dale said.
“Building approvals were down over the three months to February 2008 for multi-units in particular, but also for detached houses” Mr Dale said building approvals updates were suggesting the gap between housing supply and demand was set to widen before stabilising:
“Detached house approvals have been trending (moderately) down again for three months now, while for the multi-unit segment there is a downward trend apparent over the last four months,” Mr Dale said.
“All leading indicators of new housing, including building approvals, are pointing to flat to weaker residential construction levels in the short term.” “Looking at the three months to February this year, building approvals have weakened in every state and territory in Australia except for Tasmania and the Northern Territory,” Mr Dale said in a statement.