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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

Keeping up with the ever-changing commentary and realities of the Australian and worldwide economy (which don’t necessarily work in-congruence) can be pretty daunting. Whilst no economist myself, I nonetheless happily offer my opinion on “the real state” of play as I see them.

There have been a number of moves taken by Kevin Rudd of late to primarily ensure that confidence in the Australian banking system is not tested, and to prevent any panic (short or long-term) which could cause irrevocable damage.

His recent package of $A10.4 billion recognises when an economy is tinkering on the edge of a debt-induced recession, government spending both boosts demand, stimulates consumer confidence and thus spending; and provides the private sector with cash flow needed to meet its debt repayment commitments.

As such, I believe the following aspects of the package are positive:

  • Assisting pensioners and families;
  • Guaranteeing deposits at Australian banking institutions

On the other hand, I fail to see how increasing the First Home Buyers Grant and increasing the number of grants will have any long-term positive help to the real estate market. It really is like Nero fiddling whilst Rome burned.

Quite simply, the root cause of this crisis is excessive debt that drove house and share prices to unsustainable levels. Times appeared on a never-ending high as the housing bubble continued, but this was only fuelled by the money was adding to demand.

An increase in $7000 is marginal at best:

  • given that it only represents a small percentage of current house prices:
  • given that most first home buyers are likely to be located in areas where prices have already begun to soften significantly;
  • if increasing unemployment will leads to lower demand;
  • if perceptions of increased demand lead to increased supply

Debt servicing became prohibitive as house prices rapidly outstripped incomes and this lead to an increase in the size of the bubble. And whilst a drop in interest rates has taken some of the pressure off mortgage holders, consumer prices remain prohibitive, particularly when the flow of money and confidence throughout the market is not looking good.

Increasing the amount of money that first home buyers can play-with on a home may help those who can’t afford to get into the market do so is not very productive, particularly if it is factored in by all parties involved, which simply negates its use.

This at a time when the dollar’s fall has put at risk predictions of falling inflation from the current unacceptable 5%, and Australia’s international debt is climbing.

What is needed is not a boost to the First Home Buyer’s Grant, but a 1% cut in interest rates by the Reserve Bank on Melbourne Cup day, while Government’s of all levels must stimulate business with tax cuts otherwise business will be forced to stop hiring new workers and lay-offs of existing workers will increase substantially. The bubble must be deflated, not stretched to the point of no return. Simon Turner

More information: Interest Rate articles & Henry Thornton (our favourite Economic Advisor)

NERVOUS home buyers have not been reassured by Reserve Bank signals that interest rates will remain on hold, with auction clearance rates remaining low throughout the country over the past weekend (12-13 April).

With mortgage rates rising so rapidly in the last few months, buyer sentiment in the property market has taken a battering, and even though the Governor of the Reserve Bank has signalled rates are firmly on hold, this doesn’t seem to have provided much comfort to buyers.

In Sydney, the clearance rate was 50.2 per cent, only a slight improvement on the previous week’s dismal 45.7 per cent. The most expensive sale was a five-bedroom house in the beachside suburb of Bronte for $4million.

Melbourne’s clearance rate was 62 per cent, well below last year’s 84 per cent. The median house price was $552,000, with the dearest house, at Canadian Bay, fetching $2.5million.

In Adelaide the clearance rate was 47.2 per cent, a dramatic drop from last year’s 73.5 per cent.

Brisbane’s property market continued to nosedive. The clearance rate for the weekend auctions was 35.7 per cent, down from last week’s 37.9 per cent.

With a market that has a large number of unsold inventory, a bottleneck is being formed. This reflects the large number of buyers originally encouraged into the market this decade by government initiatives such as the First Home Buyers grant who took out loans whose repayment schedules were far larger than they could reasonably pay

Subsequently, rising mortgage rates are forcing many of these people to sell.

Given that buyer confidence is low, and there’s more stock on the market than there are buyers, something has to give! And, at this stage – confidence and house prices are giving way in equal measure.

Simon Turner

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