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The Reserve Bank of Australia (RBA) will meet on Tuesday 2 December and, the Marquette Turner team expect, they will make a fourth consecutive cut to the official interest rate.

A survey of 18 economists by the Australian Associated Press revealed the following:

  • All 18 economists believe the RBA will cut interest rates
  • 11 economists expect the rate to drop by 0.75% (75 basis points) putting interests rates at 4.5% (the lowest since June 2002)
  • 5 economists believe the cut will be 1% (100 basis points) leaving interest rates at 4.25%, the lowest level ever.

Time will tell who wins the bet, but home owners and buyers alike will be the winners of any rate cut.

Simon Turner

FYI: Read related articles on Interest Rates; the Credit Crunch; and the Economy

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

FYI: Read more articles on Interest Rates; or the Australian Economy; or Housing Affordability

More information: Go to the RBA; Bloomberg and REIA’s websites

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

Part 1 of a 2 Part Report (read Part 1)

Yesterday’s rate cut of 75 basis points 0.75%) was the right decision by the Reserve Bank of Australia (RBA). Fifty points (0.5%) definitely would not have been enough after the release of some of the worst economic data in many years. I had predicted in an earlier E Magazine that the cut would be approximately 100 basis points (1%) but the Reserve Bank chose the 75 point cut – maybe concerned that two consecutive monthly cuts of 100 basis points (1%) would look like panic.

After the October rate cut of 100 basis points (1%) the markets enjoyed a short lived spike but since then shares have fallen 11%, the dollar 8.2% – in fact since July the Aussie Dollar has been in freefall from around US98 cents to around US66 cents and every piece of economic data since has shocked on the downside.

So, the October interest rate cut was a huge success – just no Australian seems to have benefited. The new conversation points from the Reserve Bank Governor are China’s economic slowdown, significant weakness in industrialized countries and weaker domestic spending than expected. “.

The Reserve Bank has blood on its hands – they have run monetary policy with a single inflationary vision. Australia has been exceptionally fortunate to benefit from the age old reliance on digging up the country – the resources boom.

The problem is that metal prices are down about 35% this year and coal is down around 50%. Given that entrepreneurship is barely encouraged in Australia and schools teach children to get a job and become employees, what is next for the country?

Last night a US central banker used the word “deflation” and told Bloomberg that there would be no growth in the US next year and that inflation had been “vaporized” – meaning that prices are likely to fall for a period of time. Our Reserve Bank couldn’t see this coming and see that this might affect us?

The fact is that the RBA has been caught with rates way too high and their obsession with controlling inflation is now backfiring as Australia “suddenly” heads toward a recession. The foresight of these people are in line with the “fat cat executives” who suddenly work out that their companies have no money – with all of the models and supposed analytical data at their disposal they seem to find it difficult to look out the window let alone ahead several months..

The official cash rate should be another 1.5-2% lower (at least) than it is now. NSW is a basket case of a State and is in recession – the only Australian State that is – but who will be next to follow? New Zealand is in recession, so is Japan – but the RBA was caught off guard. How?

Michael Marquette

FYI:  Read Part 1, or more stories on Interest Rates, the Australian Economy, or the Credit Crunch

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

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.
  • 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;
  • 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

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)

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.

Michael Marquette

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.

Michael Marquette

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.

Simon Turner

IMPORTANT: If you are finding it difficult to cope financially, read our article on Coping with Financial Stress

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.

Michael Marquette

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

A recent survey has found 47% of property investors and one third of homeowners could be forced to sell up if interest rates increase by 1%.

This is certainly worrying news for many Australians, at a time when ANZ have predicted interest rates will rise by 0.5% before the end of 2008, with the bank tipping that a 0.25% rise will happen as early as August.

If ANZ is right and the banks continue to raise rates beyond the RBA’s official cash rate increases, the doomsday scenario of rates climbing by a further 1% could eventuate late this year or early next.

The survey of 2331 people by research firm Coredata also found that 76% of respondents are finding mortgage repayments more difficult after seven official interest rate rises in two years, and around 20% of borrowers are using more than half of their total household income on home loan repayments.

One in five respondents say they were running into debt to run their households and 67% claimed their financial situation is worse now than 12 months ago – an increase of 21% from November 2007.

Future interest rate rises may prove controversial. Former Reserve Bank of Australia governor Bernie Fraser says there may be a need to re-think the way the central bank attacks inflation, if rises in food and fuel prices persist.

Lachlan Semple of PSK Financial Services told Marquette Turner that “interest rate increases will further entrench a two-speed economy – slowing household discretionary expenditure while the resources boom continues, driven by insatiable Asian demand. Households, not businesses will feel the pain of recent and future increases, with mortgage servicing costs already up 40% in 12 months. It will feel like a recession in Western Sydney and the the outer suburbs of Melbourne with a subsequent flow on effect to other areas.”

International commentators have noted that Australia is fortunate that it’s government and the RBA have not tried to fend off inflation altogether, but has been quite tough on managing what it can relative to other Western nations.

For those paying higher petrol and food prices, and increasing household income going towards mortgage repayments this is, however, of little comfort for many Australians.

Michael Marquette

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