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The Reserve Bank has slashed interest rates to the lowest level in history to 4.25%. The Reserve Bank cut rates by a full 100 basis points (1%), making property an attractive option for those in search of investment options given the volatility of the stock market.
Australian interest rates have averaged over 8% for the last 59 years and the Bank has signaled that it is serious about avoiding a recession. It is projected that Australia will continue to grow in 2009 and avoid recession, one of the few nations predicted by the Organization for Economic Cooperation and Development (OECD) to perform positively.
The massive rate reduction should give buyer confidence a boost and increase the level of buyer enquiry across all price ranges. We have started to see increased levels of enquiry from the United States with the current exchange rate hovering at $0.65-$0.66 US.
I believe that ex-pats and foreign investors will increasingly recognize the benefits of investing in the Australian property market.
Part 2 of a 2 Part Investigation
The low sales volumes that we have seen in 2008 have resulted from fear, necessity and pride. Each has played a role in reducing the number of sales.
In so much as fear has contributed people are always cautious during times of upheaval or unrest.
Economically it has been a minefield of a year with Sydney property prices generally being stable or heading south. The stock market has shed billions of dollars and nervous investors and even more nervous fund managers have either panicked or halted all activity to see where it would lead – we certainly have a good idea of that now.
As interest rates increased early in 2008 many people feared that the return of Labor to the Federal Government would bring devastatingly high interest rates and therefore chose not to buy – again they played a wait and see game.
Vendors, convinced that the economic bliss was sure to continue refused to accept lower prices from buyers and the number of unsold properties has increased as the year has gone on. The financial turmoil has seen companies tightening their belts and in some cases withdrawing benefits, bonuses and international transfers.
This has greatly affected the number of “Private Brokerage” level sales and has played havoc with the top end Luxury rental market. Without companies paying absurd amounts of money to house executives the demand for top end rentals has all but dried up – with Luxury Landlords accepting massive cuts in rental amounts, moving back into properties or simply leaving them empty (Not very smart in most cases).
The final and least understood factor that has resulted in decreased “Private Brokerage” level sales is the age old problem of pride. The uncertainty that the year has provided has caused many would be vendors to reconsider plans to sell in case they were seen by family, friends, colleagues and competitors as potentially having financial problems.
It has been reported in Sydney newspapers that journalists were waiting to see which Luxury Homes were put on the market as this may have been an indicator that a company or associated interest was struggling and in need of cash. It is amazing what people will do out of pride and emotion has played a huge part in the decreased sales volumes we have seen.
Fundamentally Sydney is well positioned. It has stunning natural beauty and there is a low rental vacancy rate and net immigration is quite high putting further demand on housing in the city. This should see the market steady and confidence return in 2009, however we cannot ignore the differences between average or low end property and Luxury “Private Brokerage” Sales.
Click on the link for PART 1
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It’s difficult to watch the television, read newspapers or generally go outside of your home right now without being bombarded with negative news on the economy. The US economy is all but in recession, New Zealand is already in recession, Japan is in recession and as of today so is the United Kingdom.
The Governor of the Bank of England has predicted no growth in the UK in 2009 and believes that the recession will be as bad as the early 1990’s. The British Pound has hit a six year low against the Euro and inflation in the UK is currently at 5% (the target set by the Bank of England is 2%).
Deflation is now a real threat in the UK which can be just as concerning as inflation. Deflation refers to a general decline in prices, often caused by a reduced supply of money or credit. It can also be caused by a decrease in spending by Governments, consumers or investors. Deflation is simply put as a decrease in price due to decreased demand – therefore the decreased demand results in decreased production and increased levels of unemployment.
With this deflationary threat looming it is likely that we will see interest rates continue to fall with some economists predicting UK interest rates will drop to around 1%. The recent massive 1.5% rate cut in the UK and two consecutive monthly cuts in Australia (1% and 0.75% respectively) are sure signs that central banks have finally seen just how serious the current situation is. I believe it’s a perfect time to purchase property safe in the knowledge that interest rates are going down – this is a wonderful situation.
FYI: Read related articles on Recession; the UK; or Buying Real Estate
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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”.
Michael Marquette
FYI: read Part 2
Tuesday 4 November 2008 is shaping up to be a historical day:
- The US Presidential Election will either see the first African-American President (Obama) or the first female Vice-President (Palin) together with the eldest first-term President (McCain).
- The Reserve Bank of Australia will meet and, all things being equal, will almost certainly cut interest rates.
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It’s Melbourne Cup flutter fever throughout Australia.
You don’t need to be a gambler to have an opinion on the outcome of at least two out of three events, and broadly speaking one could achieve a hat trick by betting that “a horse” will win the Emirates Cup in Melbourne.
Where the interesting debate lies is in the margin of change. If Obama wins, how many Electoral College Votes will it be by? And, should the RBA cut interest rates, how much will the reduction be?
Let’s hone in on the Australian interest rate debate. Current factors influencing the RBA are:
- The Australian dollar is weak, hovering around US60 cents to the Australian dollar and having fallen 40% since July;
- Inflation is high (around 5%);
- Consumer and business confidence is lowering;
- Global growth prospects are poor;
- World oil and commodity prices are becoming more sensible;
- Unemployment is marginally on the increase;
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The government’s intervention by guaranteeing some deposits has not created the market stability intended.
So, given that it’s pretty much a given that interest rates will be cut, how much by? Well, the Marquette Turner team, in taking the above conditions into account, believe that the cut will be between half of one percentage points and three quarters of a percentage point. This will be an important shot in the arm for home owners and home buyers alike – whether it will be a silver bullet for the Australian housing market is probably on par with the likelihood of the eldest horse in the race winning from mid-stream. Simon Turner
FYI: Read other articles on interest rates, or housing affordability, or the US Presidential Election
Pundits, experts, and economist’s alike all predicted that the Reserve Bank of Australia (RBA) would today cut interest rates, but by a whole percentage point (100 basis points) is quite dramatic.
The cash rate now stands at 6%, down from 7%, with some predicting that rates may even fall to 5% in 2009.
Worldwide stock markets have been chaotic this week, with no one immune (the Russian market fell by 19%), although news of the RBA’s cut has created a positive surge in our index.
Quite simply there is a gridlock in the credit markets – very few institutions are lending, thus borrowing has ground to a halt.
To keep the economy moving in Australia, it is essential that our banks pass on the RBA’s commendable and brave “gift”. Whilst many financiers around the world have seen the trust in them dissipate in just a few short months, Marquette Turner maintain that whilst not completely immune, Australian lending culture will not be dented quite as much as many others, although there is no escape from the inevitable tightening of the lending reigns.
Therefore, so long as our banks quickly pass on the cut and allow sensible lending, smart investors will be in a position to take advantage of the opportunities that will present themselves in any form of market – recession or not.
MORE INFORMATION: Read the RBA Governor’s statement Read our press release
The global market’s erratic performance over the last week has certainly called into question the financial strategies of many (including, it could be said, of the hapless President George W Bush). Regardless of whether one agrees or not in principle or practice with the Federal bailout in the United States, we should at least begin to see a little more stability.
That’s not to say that all will be bright from hereon in. The market crunch, or more specifically the credit crunch, has seeped into all nations and has affected all manner of finances, including Australia. Confidence has definitely been damaged.
The simple fact is that Australian property prices cannot help but be affected given the high levels of debt in Australian households, and our relatively high interest rates as a ratio of household debt to GDP compared to the US.
Even should interest rates be cut further in Australia, as they likely will, we are simply likely to feel an ease of the stress of mortgage pressure rather than an immediate flock to property: the credit crunch has reduced the amount of credit available, and many people have more than enough debt to suggest they’ll have a proclivity to take on more.
The Land of Opportunity
These are also the times of opportunity. With confidence dented all around and property prices sluggish and unlikely to head in any northerly direction for even close to the next 18 months, there are many good buys on the market now, and many that will come onto the market.
Those buyers that are willing to take a long-term view on property values – as one always should (the “quick-buck strategy” is never one that is risk-free) – as well as applying sensible purchasing decisions based on the amount they can borrow with a comfortable buffer in addition to intrinsic good value – will in a few years be looking back upon these times with great satisfaction.
Not panicking during an alleged crisis, taking smart, confident and unemotional decisions, and investing wisely will mean that property – right now and in future – is logical and rewarding as one can hope to find.
What Will Happen Next?
Expect an interest rate cut by the Reserve Bank next week and more in the following 12 months. Expect housing demand in Australia to remain relatively buoyant given our growing population. Expect an easing Australian economy (together with more manageable inflation) due to weakening demand from China, whose economy is heavily hinged on US demand.
Quite simply, so long as share market’s are unappealing, property investment will remain ever the attractive option.
With the average value of homes in Australia having increased by approximately 150 per cent since the millennium began, this well earned increase will generally be retained, and further goes to highlight the intrinsic opportunity that wise, long-term property investment provides.
IMPORTANT: If you are finding it difficult to cope financially, read our article on Coping with Financial Stress
Australian interest rates have fallen, consumer confidence is up, unemployment is down, and the Australian share market has hit its lowest point in 2 ½ years. Furthermore, the Australian dollar is hovering around US80 cents and oil has now fallen below $92 a barrel. The US stock market has just had its largest fall in a single day since the crash of 1987!
So what is going on? What does all this news mean? It can be hard to decipher the positive news from the negative, and even more importantly how every piece fits in the economical puzzle.
Importantly, the Australian economy has been extremely resilient and the nation as a whole looks like it will avoid recession, although New South Wales is now officially in recession. How one State and no other can be in recession is hard to fathom, however, it’s simplest to point the finger directly at the individuals in Macquarie Street that continue to mock the purpose of State Government.
The resources boom has certainly helped States like Western Australia however other non-resource States like Victoria, South Australia and even Tasmania are all moving along nicely. Politics in “The Premier State” is beginning to look like Italy where it’s expected that Governments will constantly change and waste millions of dollars on businesses that they have no expertise to operate.
The Italians spend over $1 million per day propping up Alitalia and the New South Wales Government just can’t get anything right – electricity, water, education, health. The list of failed State Government owned enterprises is endless and yet the economic outlook for Australia is good.
Whilst a further interest rate cut looks almost certain it would help if it were sooner rather than later. It will be difficult for Reserve Bank Governor Glenn Stevens to justify holding rates where they are with the NSW Government running the state as if it were a social experiment. The importance of NSW to the overall Australian economy should not be underestimated and even with inflationary and employment pressures to consider it would seem that Mr Stevens will have to play a large role in resuscitating NSW.
My tip is that there will be a further cut in official rates in October of 25 basis points and with the global stock markets in disarray property is looking better and better as an investment option. If rates fall and the banks are willing and able to lend to would be purchasers we may be in for a very positive Spring and Summer real estate season. With NSW property sales volumes down 44% on 2007 figures and the rest of Australia struggling to gain traction the Reserve Bank should be primed to kick start the real estate market. We can only hope!
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.
Home owners and investors have welcomed suggestions that the Reserve Bank of Australia will cut interest rates this year, but will the Banks pass the rate cuts onto borrowers?
Prime Minister Kevin Rudd has told Australians to change banks if they fail to pass on rate reductions. The banks have had no problem increasing rates to levels higher than official rate increases and have even increased rates despite the Reserve Bank keeping them on hold.
In an interview with The Australian Financial Review last week I was asked what it would take to restore confidence in the market. I expect buyers to remain cautious until the banks show that any rate reductions will be passed on. I believe a rate cut of around one per cent is needed to restore buyer confidence as I’m hearing increasingly that buyers and vendors are skeptical that banks will pass on the rate cuts. A reduction of 100 basis points will result in the market reacting in a positive way, even half a per cent will be looked cautiously.
So the question is buy now or wait? The answer is simple. There are some fantastic buys in the market at the moment and this will continue for the foreseeable future. As the stock market wobbles, dividends decrease and share prices drop bricks and mortar will become a major focus for many investors.
If you find the right property at the right price and choose the right lender your decision is an easy one to make. My only advice is to ensure sure that you keep your lender honest, and if “changing banks” as PM Rudd suggests, make sure you are aware of all fees and costs that may apply.
Michael Marquette
Marquette Turner Luxury Homes 