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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.

Michael Marquette

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

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

The Commonwealth Bank increased its interest rates this week, thus becoming the third of Australia’s banks to do so.

The cost of a standard variable home loan offered by the CBA will rise with immediate effect by 0.14% to 9.58%.

The Commonwealth Bank’s move comes after St George and BankWest raised rates on their standard variable home rates, but ANZ, NAB and Westpac have still to make their move.

The Reserve Bank of Australia kept the official cash rate on hold at 7.25% at its meeting earlier this month having increased its cash rate by 50 basis points since the beginning of 2008, in an effort to cool the economy from inflationary pressures.

Australian banks have thus far added between 40 and 60 additional basis points to cover the higher cost of funds and, according to critics, recoup profits lost to non-bank mortgage lenders in recent years.

For those home loan borrowers that are paying more off their mortgage than required, this buffer means that slight increases make little impact. Those that are not in such a fortunate position will, of course, need to tighten their belts even further.

There are, however, some positive signs ahead. The price of oil has been retreating this week, Australian inflationary pressures are cooling, so there may be only a few interest rises to go before we experience the peak. And, with consumer confidence at the lowest since in 16 years when, as it happens, interest rates were 17%, we are unlikely to suffer the experiences of the early 1990’s.

Michael Marquette

Figures suggest that borrowers are shying away from fixed-rate home loans, a sign of growing belief that the economy is slowing enough to ward off interest rate rises.

Traders in financial markets are, however, betting on quite the opposite. Yesterday, they lifted their bets that the Reserve Bank of Australia will raise rates more than once by the end of the year. Michael Marquette of Marquette Turner continues to believe that we are likely to see at least two more rises by the end of the year.

By March, almost one in four borrowers chose to lock in their home loan rate to avoid being caught out by more increases. The demand for fixing loans waned, however, in April, and fixed-rate loans dropped back to 17.5 per cent of the total market.

This could perhaps suggest that borrowers are becoming more pessimistic about the state of the economy and therefore confident that inflation and rates could fall.

The unsteadiness of the market comes amid more evidence of a dramatic fall in confidence among prospective home buyers. Housing finance figures released by the Australian Bureau of Statistics showed the value of new housing loans dropped 3 per cent in April – the third month in a row of solid falls.

Christine Watson

Even though the Reserve Bank this week kept interest rates on hold, it still faces a tricky balancing act in bringing inflation back to its 2-3 per cent target band as it risks pressing too hard on the rate brakes and driving the economy into recession.House prices grew at their slowest quarterly pace in a year during the March quarter – one sign that interest rates are having their desired impact.

And the number of job advertisements published last month jumped after a slow start to the year, in a sign that while the economy may be slowing, there is still plenty of strength in demand.

A senior strategist with TD Securities, Joshua Williamson, said a broad array of goods and services were contributing to inflation, not just higher petrol and food prices.

The Bureau of Statistics’ house price index rose just 1.1 per cent in the first three months of this year, compared with a 4.1 per cent increase in the December quarter.

Sydney posted the sharpest decline, with average prices falling 1.5 per cent, followed by Darwin and Hobart, with falls of 1.3 and 0.7 per cent, respectively.

Property markets in Brisbane and Melbourne remained buoyant, with prices rising by 2.8 and 4.1 per cent respectively.

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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