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Ben Kingsley

03/10/2017
Blog post by Ben Kingsley

RBA Rate Decision – October 2017

Same old, same old from the RBA today, the cash rate remains on hold at 1.5%. So no real movement.

 

In terms of economic news, let’s look globally first, and the US is probably the main story here. We did see the Trump administration release a Tax Reform package. Now, this tax reform package is all about that one flat tax rate of 20%. The challenge with that is, it hasn’t been so well received, and we think the Congress may not be in the position to pass that. Will this reform fail as the Obama Care reform has also failed for the Trump administration? We’ll have to wait and see.

What we do know however is that the Fed Reserve has been signalling to the market that they are going to be changing interest rates. So that means, interest rates are on the march and in combination with the iron ore price around the globe coming off as well as some sluggish numbers out of China, that’s actually putting pressure on the Australian Dollar. It’s obviously good news for Australian exports, but for those of us who are about to travel overseas, the US dollar is looking to be a little bit stronger than the Aussie dollar.

 

Domestically speaking, let’s have a look at some of the numbers that have come out recently.

First of all, unemployment. So the unemployment rate is currently sitting at 5.6%. That’s the same as last month and we did see another 54,200 jobs created this month.

Now, let’s turn our attention to the ANZ Job Ads numbers. They are up 2% and what’s important about those job numbers is that the overall year on year, they are up by over 13%. That is a really good number in terms of those forward-looking jobs that come through.

With regard to business confidence, this one is interesting. So the business confidence numbers were actually down from 12 points to 5 points for the month of August. That was a significant fall, but no one can really put their finger on what exactly caused such a big fall. It’s still obviously in the positive, so nothing to be too concerned about. Conversations are around the geopolitical environment such as North Korea those type of things but let’s not panic around that number and see where the trends go for that.

For consumer confidence, well, it was up 2.5%. That’s a good indicator that we are clearly seeing some growth in confidence. However, it’s an index in the sense that anything above 100 is said to be an optimistic outlook and anything below 100 indicate that there is still pessimism in the marketplace. The current reading still sits at 97.9, so we need to get that back above the 100 mark. If we look at the long-term numbers in Australia, we are seeing around 101 for the index.

Finally, I want to talk about retail spending. Now, we haven’t got the August numbers yet. They’ll be out later this week. But what we can talk about is the July numbers. We did see retail spending up 3.5% on last year’s numbers. But in terms of some of the feedback that we are getting from retail land is that it’s pretty tough out there at the moment. So that could mean that we are not going to see a really strong set of numbers moving forward.

Now that leads me to talk about this concept of secular stagnation.

Secular stagnation is where we have low growth; we are talking about maybe 1 – 2% growth and low inflation.

For the past couple of decades, we are more used to 3 – 4% growth number and inflation running around 3%. Where else, in recent times, we are seeing growth running around 1-2% at best and we are seeing inflation also being very soft if not, not existent at all. So it’s important to understand that we may be in a period of secular stagnation because we have these record low cash rates. We really do need to get that confidence back up in the marketplace to try and see that growth and then, to see interest rates rise. But right now, with household debt at the second highest level in Australia, that’s a real challenge for us.

 

And in terms of the property market, let’s change the pace a little bit.

Sydney’s property market is definitely starting to cool. That’s a good thing. We are certainly seeing clearance rates in the outer suburb of Sydney starting to slow down. We still see sort of a strong activity in the inner city areas but that’s probably a result of very very strong economy but we are beginning to see the stock on market increase in the Sydney market. So we’d expect to see a slowdown in that market.

In terms of the Melbourne market, we are seeing really strong population growth. We still think there is a fair bit left in the Melbourne market in regards to potential price growth. Auction clearance rate is holding pretty firmly. We’ve just finished up the AFL grand final, so there will be more stock coming on the market.

Now on to the Perth market, it’s really starting to bottom up now. Maybe a little bit more to go. Adelaide is still being a pretty steady market. Reasonably strong in those inner city areas. And if we look at the South East Queensland, there are 3 markets there, Brisbane, Sunshine Coast and Gold Coast. Really tight vacancy rate at the Gold Coast and Sunshine Coast. High yields are pushing up prices in those sort of low entry level for flats and appointments. And then, the other story of Brisbane is around free-standing houses. They are performing quite well and obviously, the ones to avoid is the high and medium density apartments in that particular area.

Canberra is doing really well. But again, warning for the Canberra market, the land tax rate is too high. So you wouldn’t necessarily want to be an investor there. You would probably give all your money over to the tax man at the end of the day so be careful in regards to that market.

Hobart is also performing very strongly. Solid market and we’d expect that it’s driven by investors who are going in there chasing the high yield. And Darwin is another market which is showing excellent yield but certainly a sluggish market in terms of level of demand. So we are not seeing any price growth in that particular market.

Overall, the market position reasonably well. We are seeing some regional areas such as North Queensland and some of the mining areas in WA are starting to bottom out as well.

It’s an interesting time around the property market. Always make sure that you focus on supply and demand, and you get some advice in terms of where you are going to buy because the best time to buy is when you can afford it and also, to buy in those markets where there is further capital growth to be had.

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