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Ben Kingsley Blog post by Ben Kingsley

RBA Cash Rate Decision – February 2019

Today Governor Lowe and the reserve board met for the first time in 2019 for their February cash rate decision.

That decision was to keep the cash rate on hold — but for the first time I suspect that that board meeting would have gone on longer than normal. And that’s because there has been some deterioration going on in the economy.

I wanted to share some of that information with you in this important update.

Firstly, let’s have a look at the global affairs — so we do know that globally the world economy is slowing.

We can focus in on where that’s coming from — and a lot of that has to do with the political environment that we’re seeing globally. What we’re talking about here are the US and China trade wars that are going on, the Brexit from the European Union from the UK and, just generally, China’s slowing as they obviously can’t trade with the world’s biggest consumption economy, being the US, as much as they had in the past.

What that has meant is that the reserve board in the US have certainly started to slow down their tightening policy and they’ve kept their cash rate on hold. Now that’s put some comfort around bond markets and lending markets, and we’re now starting to see some pressures ease in terms of cost of money for money to be traded around the world and to be lent out.

The other important piece is around the economy in China — so GDP numbers before Christmas were a little bit light on, and what that has meant is that we are starting to see China looking at some internal stimulus to try and get their economy moving, but also being very conscious about asset appreciation and asset bubble pricing in their property market.

But the real developing story here is around what’s happening in the domestic economy.

I want to shed some light on that because this is quite important now. We’re getting to a stage where confidence and sentiment is having a real impact on what’s happening in the real economy. Firstly, we’ll put that into context… what we are talking about here is household consumption.

So household consumption makes up around 55% of GDP. Inside of that is retail spending — retail spending is a third of that number. And we’re certainly seeing some very, very poor numbers being reported in regards to retail spending as households start to tighten their purse strings.

The latest data out today from the Australian Bureau of Statistics (ABS) was commentary that retail spending had tumbled — by that, it meant that it was down 0.4% after being seasonally adjusted. And that has certainly missed expectations when people thought it might be flat. So that is an early warning signal in terms of what’s actually happening out there.

Around the Christmas time, we did see some news in January around CBA talking about the merchant machines and how much money they were taking through the merchant machines around Christmas — and they were light on. And also NAB did a spot-survey to see how business performance went, and the feedback they were getting was that it’s pretty tough in the retail environment. That obviously makes for some concern.

In addition to that, we have obviously seen the credit squeeze — and I’m going to come back to that in a minute.

But in regards to building approvals, there is a clear indication that our recovery, which was led by a construction boom, is now well and truly over.

Residential building approvals in December dropped by 8.4% when they were anticipating a flat result. That was in addition to a 9.8% fall in November. So in the last 2 months, building approvals have dropped 19% and are now down 22.5% on the year and 39.1% from their peak in November 2017.

Now, the weakness is across the board — it’s not just in unit developments; it’s also in house and land packages. So that’s also telling you the impact on the availability of credit and the confidence to buy in a currently correcting property market.

We also want to lean in to consumer confidence around this story… because that’s the other piece here.

The January result moved for the first time in a long time from Optimistic to Pessimistic. It was the largest fall in 3 years, and from this time last year is down 5.3%. If you actually look at one of the sub-readings inside this index, which is the Economic Outlook — so this is consumers’ view on the economic outlook for the next 12 months —it also dropped significantly. It dropped 7.8% — and it’s the biggest fall since September 2015, where we saw a minor correction on the stock market and the economic news during that time was a little bit more subdued.

So it’s interesting isn’t it? Considering where we were in the mid-year, June-July, of 2018 — the economy was actually moving along quite strongly, and jobs growth was evident and everything was going well.

That does lead me into unemployment or employment…

Some of the early indicators — because this hasn’t flown through to the actual unemployment numbers yet. in fact, why I delayed my update today was because I was really interested in what they had to say about employment. And the RBA are still quite optimistic that unemployment will reach a low of 4.75%. Now, if I’m looking at the advertised job numbers for ANZ, they were coming back in January and saying a fall of 1.77% and it’s the third consecutive decline. The annual pace of job ads has contracted by 3.77% in January, down from an increase of 4.2% in December. And it’s the first annual decline in job ads since April 2015. So, yes, we had that little bump when it came into the Christmas retail period, where everyone thought that there would be a good bump in Christmas, and it just hasn’t materialised.

Inflation isn’t a problem for us — it’s a dead duck. But the reserve board’s job is obviously to bring inflation up to between 2% and 3%. At the moment it’s sitting around that 1.8/1.9%. So we’re outside of that, which does give the RBA capacity to drop the cash rate to try and stimulate more growth in the economy if it continues to halter like it is at the moment.

Yesterday we also saw the Royal Commission Final Report being handed to Government, and the Government’s responses to the 76 recommendations.

Obviously, what we saw in the Royal Commission was some distressing experiences of people dealing with financial services industries — from banks to superannuation providers, insurance providers and the odd example of mortgage brokers. What was disappointing about that was, considering the bounce of the share prices the banks have had, was the decision to change the way in which mortgage brokers were remunerated.

That obviously says to the smart people in town is, “If bank share prices have gone up collectively by 6% today, what does that tell you about better consumer outcomes?” If there’s less choice, the banks will charge you more for your loan. So I’m very disappointed by that and, hopefully there will be some cooler heads that prevail in terms of what happens there.

What does that also mean in terms of out-of-cycle rate rises? Well, we did see the banks get in just before the Royal Commission release, and we’ve seen several banks and non-bank lenders increasing their interest rates in the current environment. So that is obviously concerning because that hits the hip pocket of the spender as well.

I want to circle back over to business confidence. In the middle of last year, I was talking about the fact that we’d moved from a construction boom and we were waiting for that business confidence and business spending and business investment to occur. And we did start seeing some of that that throughout that first half of the year — but then in the last quarter, and certainly the result in December, was a bit of a shock in regards to what’s happened around that business confidence and also business conditions. It tumbled in December — and we are talking a sharp correction from a +11 reading down to only a +2 reading.

And this is the biggest one month fall since the GFC. It was across all business sectors, and is the weakest reading since September 2014. So that is telling you something. If business isn’t confident, what’s going on behind the scenes there?

So that leads me to my point around “Why has this occurred?”

Why has the economy, which had so much promise and potential corrected to the level that it has? Part of that story comes from APRA’s decision to slow down the amount of lending that was happening in the market place. At the time — and I’ve said this on many occasions — that was a sensible decision. There were far too many investors in the property market and there was far too much lending going on that was basically causing asset appreciation to happen too quickly.

The most important thing that APRA did then was cap the servicing rate, which affects how much you can borrow. So don’t worry about the speed limits they put on investment lending— don’t worry about the interest-only policies they introduced — none of them have had the impact that the servicing calculator changes and enforcements have had. That has been the catalyst for this correction.

Now, they prevented systemic risk occurring in the market place — but now they could be the cause of a correction that could turn into a recession for the Australian economy. And I use those words carefully.

But ultimately, APRA need to be able to — in conjunction with ASIC in responsible lending, given the Royal Commission’s handing has come down — enforce some police lending; too much and that is going to have a big impact in terms of economic activity, GDP growth and the broader jobs for the Australian people. So number one, APRA’s credit squeeze.

Number two, you’ve heard me talk about this before. The Wealth Effect. The price of your home coming down, the share market being uneasy has left people a little more cautious about discretionary spending. We’re seeing that in the retail sales numbers. That’s real, it’s happened. We also have seen it in terms of car sales. New car sales have also fallen off a cliff.

Now, I also put down the business confidence and conditions survey down to a couple of other things. Firstly, the implosion of the Liberal Party. Now again I use my words carefully here. Well, no, I don’t. Let’s be honest. It was the stupidest decision ever to be able to sack a standing Prime Minister and to have the implosion that you did when you are the custodians of the Australian economy. So a big X to the Liberal Party in terms of the work that you did in basically disrupting the economy. What that has led to is effectively a Steven Bradbury experience where Labor are going to skate over the line and take control of the economy. Again, I’m going to use my words carefully here. The Labor policy and I’m not saying Labor in general because I voted Labor for a long time of my life. I am a big believer, a very, very big believer in giving everyone opportunity but I’m also a big believer in making sure people stand up and take that opportunity rather than me gifted that opportunity or a hanged opportunity.

I mean it is all about a fair go, but it’s also about having a go.

So I’ll leave that out there.

Now it’s very clear in talking to people that in terms of the Labor’s taxation plans of $200 billion in additional taxation, has spooked the business market. That has also led, even though they’re not in power and this might sound a little bit ridiculous, but the reality is… When you have uncertainty, you don’t have business investment. When you’ve got a party that’s coming into power who doesn’t have the same level of a record in managing the economy of late is challenging. Business leaders are making the concerning decisions of holding back and I, and again, I’m using my words carefully here because I don’t want this to be a Labor-bashing exercise.

What I’m trying to say is that it is going to put a handbrake on the economy.

With this uncertainty and of course with all of these policy positions that Labor have about clawing more and more tax revenues in to do more and more spending isn’t favorable for business conditions, more broadly speaking. That could put some pressure on the economy as well.

So, what is going to be done or what can be done to avoid going into a deeper correction in the property market and a deeper potential around going into recession in Australia? First things first, is APRA need to now understand, as custodians of the banking system, that they may also put systemic risk into the broader economy if they don’t relax the servicing calculators.

Now I’m not saying go back to where they were but certainly a tweak of those servicing calculators would be a prudent measure to allow people to borrow money safely and effectively if they see fit. And they will obviously be investigations into their ability to repay those loans and meet that opportunity. That also lends me into responsible lending and making sure that the banks are able to lend money. And that all lenders are able to lend money to people who are willing to borrow that money if they see opportunity in the marketplace.

Finally, there’s no doubt from where I sit. I’m putting my name out there in terms of forecasting and it’s always difficult do that but there’s no doubt in my mind that we’re going to see at least one cash rate adjustment down. 25 basis points down, bringing the cash rate down to 1.25% with a potential further cash rate reduction if the economy continues to show sluggish signs of coming out the other side of this current slowdown.

And if APRA don’t do anything and lending’s not taking shape that may have to be the trigger. And it certainly helps those of us who have existing lending to be able to give us a little bit more money in our pockets to increase our retail spending and keep those jobs alive.

Remember what we were talking about in terms of retail representing a third of the household consumption? We make up 55% of the broader economy or there’s around 1.3 million people working in retail.

So we are talking about employment being the critical component to make sure we can get out the other side of this slowing economic conditions.

That’s a big wrap-up in terms of what needs to happen, but what should you be looking out for in regards to the next big important data?

Certainly unemployment information and employment data. Have a look at what comes out this month around that and also the business confidence to make sure if it was sustained, if it was a blip based on what they saw at Christmas or whether that’s starting to recover because those are the two big things.

There’s no doubt that obviously with our terms of trade and with potentially a big infrastructure program that that makes our GDP look good overall but in terms of per capita GDP, that is about ensuring that people have jobs and they are able to live the lifestyle that they want to live. That’s very important in terms of economic activity and making sure that we have that ability to do so.

Now I understand that this is a serious message about where the economy is going, and what that might mean for you personally and your personal wealth creation. But I’m going to also talk to you about how this also represents an enormous opportunity to be able to take action in a marketplace like this.

We’ve always talked about the best time to buy is when you can afford to buy. Buy now and hold for the long term. But there are times inside cycles where the buying opportunities look even better than in general terms — and this is one of those times.

When you are looking to get into the property market — whether it be owner occupied or whether it be for investment — there are a couple things you need to know about the 2019 property market. The first one is, it’s no longer a case of just picking any property in any suburb. More than ever it’s going to be about the right asset selection and making sure you’re going into the right marketplace. We refer to this as a flight to quality. Make sure you’re in a scarce market place where there’s strong owner occupier appeal and you’re going to do very, very handsomely over the next five or ten years if you’re able to take this opportunity. But in terms of taking that opportunity, don’t rush in. Do your research and location selection is going to be king, alright? We are busier than we have ever been before because our clients know that this is an amazing time to be getting into the property market. So gone is the guesswork, all right? We need to make sure that we’re doing the fundamental research.

That’s important. In addition to that when you are competing in a Buyer’s Market, having the negotiation skills and being in the right market with lots of data about the market conditions in that market is going to mean that you have an unfair advantage in terms of how you negotiate and the price you may be able to secure that property for. So it’s really, really important. If you are buying for upsize purposes…

So if you’ve got a growing family or you want to take advantage of moving to a better location, these are the times where you should be considering that opportunity because the buying opportunities are better now than what they are in a booming marketplace.

Sure, you get more for your property, but you have to pay more to get into that market. Now what you need to do is line your ducks up okay? And with the lining of your ducks up, the first thing you need to do because it is about credit first and it’s always about the lending piece, you need to go and talk to your mortgage broker. You need to sit down with them and you need to have a look at what your scenario represents. It could be a situation where you can retain your existing property, which is wonderful; you can turn that into an investment property and you can potentially upsize into that more significant home that you’ve been looking for, or that better location that you’ve been looking to buy into. If you can’t hold on to that asset then it is about making sure you make an informed decision.

And my final tip in this area comes down to make sure you sell before you buy. What we don’t like to see is people buying into this market and then turning around and thinking that they’ve had a good buy. All the good work is undone if they haven’t already sold their existing property and they have to first sell that property and there’s been no real gain for you at all. So make sure that if you are selling, try to look for long settlement terms allowing you enough time to then go and see if you can get out into the marketplace and buy something for yourself in that better location. Whilst I have talked a little bit about the challenges in the marketplace, the story that you need to tell yourself and the story that the best investors in the world tell themselves is, this is a time of opportunity and it’s a great time to be able to get into the market and remember property is a long-term investment.

Those of you who did get into the marketplace in 2017 — if you’re unsure, it is certainly time to look at the quality of asset that you have bought.

But a lot of the assets that we bought for our clients, from our point of view, represent tremendous long-term prospects. If you are still unsure though, get in contact with us and we’ll happily look at that information for you and see whether there’s any changes that needed to be made to your portfolio. So I realized this has been a long presentation.

I realised that there’s a lot to digest in here. But I thought it was important that we gave you a full update in terms of where the market sits and I look forward to sharing more information with you in our RBA announcements every month but you can also tune in to our weekly episode on The Property Couch at 3 p.m. Eastern Daylight Savings Time or Eastern Standard Time on Thursdays for our latest update. And if there’s information that we see is pertain to the market at that time, we will share it with you on The Property Couch podcast.

Thanks very much for your time and all the best for 2019, the year that could be a great opportunity for you.

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