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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) 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

The week ahead will be momentous for numerous reasons: The US Presidential Election will reach it’s crescendo, the Melbourne Cup will be run and the Reserve Bank will have, we suspect, reduced Australian interest rates further.

As I sit in the London sun – I kid you not – it’s worth remembering that no race is over ’til it’s over, and one must never misjudge the finish line.

Stay in the race by reading our 31 Oct 08 e-magazine, or browse through our blog.  Be ready…stay steady.

Regards,
Simon Turner

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

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