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Ben Kingsley Blog post by Ben Kingsley

RBA Cash Rate & Property Outloook for 2011

For those not in the know, the RBA board does not meet in January, so the first cash rate decision will be at 2.30pm on Tuesday 1st February, 2011.

In terms of the cash rate forecasts, there is a real mixed bag out there in terms of predictions of where the cash rate might be between now and the end of 2011. There is very little, if any support for a reduction in the cash rate. It’s fair to say only a sizable Global correction/downturn would see rates decline given the overall strength of the current economy. That being said, it will be interesting to see what effect the very devastating flooding events up in Queensland will have on the overall economy. It’s sure to impact on food prices which will affect inflation and certainly is going to affect mining outputs and the overall Queensland economy as all land transportation is affected for now.

The majority of forecasters are predicting rates to rise, from 0.25% to 1%. As I have noted in my previous commentary pieces, a further rise of 1% will really start to bite households with high debt. I am already on record saying that if they rise by 1% then I would expect a correction in values in new estate areas as stock levels rise and demand drops due to affordability constraints. Expect these locations to lose upward of 10% in value if rates raise this high.

Short term property ‘Hot Spots’ will appear, namely in cities and regional towns where investment and economic prosperity is driving up wages, housing stocks are in short supply and affordability remains under 25% of gross wages. Their runs will be short lived in property time, about 12 – 24 months, before they lose steam and momentum, as greater supply comes online or economic conditions settle and stabilise. Given you usually only have one shot at it – the challenge is going to be firstly picking the right city or town, the right suburb and then the right type of property. Short term returns will be very healthy if you get it right, and this is vital for this type of strategy as long term performance will then focus on yield growth as capital growth in these locations will rise and fall based on the economic cycle of the times. It can be a very long time betweens drinks for capital growth increases in these locations, so selection and timing is everything here.

In terms of cities – established older style accommodation close to major employment centres, infrastructure, and transport will continue to steam ahead, benefiting from demand drivers such as strong desirability to live in the location, strong employment and rising incomes meaning affordability is still within scope. On the supply side of the equation shortage of land and accommodation stock will play their role, and this year the pricing of the new stock coming online will have a drag up effect on the values of older accommodation. A minor face lift to the kitchen and bathroom may also reap inflated returns.

New accommodation coming online in city rim locations need to be well researched if you are looking to achieve a outperform result. Some developments will stack up, but the majority may not. Buying opportunities may present themselves at very attractive prices, which may be worth further investigation, but ensure you are not only aware of upfront costs but the ongoing costs, including building maintenance and upkeep, as they will eat into your profits.

In final summation – great opportunities present themselves in every type of market – whether it be a buyers or sellers market. Although it is always easier to secure properties, when ‘sheep are not flocking’, meaning that it’s easier to buy when demand is less and it certainly helps getting in early if you have a long term hold view because when the next upswing materialises you get all the value growth benefit. As for the other flocking sheep, once they get a sniff it’s a good idea to act, they will have missed feeding on the better stock and also half the upside in value growth.
Remember the very best time ever to invest to build wealth is yesterday, so given that’s impossible today is always the very next best day.

 

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