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Ben Kingsley Blog post by Ben Kingsley

RBA Rate Decision – April 2015

Today the Reserve Governor and the Board met and they’ve kept interest rates on hold for the April 2015 board meeting. That has kept the cash rate at 2.25%.

Now, why had they kept the rate on hold?

Well the reasons come down to a few things. To begin with, they’ve probably seen some early signs on the economy starting to pick up. Those early signs are around business spending. Business spending has seen an uplift in the first quarter of this year. In addition to that, they are also seeing job ad growth. Yes, unemployment has trickled up higher but they are actually seeing a lot more jobs coming into the marketplace which says, “Good, businesses are spending and we are going to see the job market to hopefully improve.” It’s still not a satisfactory level. If we look at the overall current growth around that 2.5% – 2.75%, it is under where we need to be. So I do suspect that we would see a rate cut and that might be coming as early as next month but if we do see a real uplift in next month’s data, we might actually see that rate cut not occurring. That’s a big call and I’m still waiting for one more cut because generally, the sentiment is still struggling.

The other positive thing as to why they have kept interest rates on hold is around retail spending. The numbers are up in January and it’s showing some positive signs that consumers out there are spending. The other big news story and this is the one that I’m harping on about and this is the reason why I didn’t think we would go so aggressive on rates is we are actually seeing a property surge. The Australian property market is in good hands in terms of what we are seeing – low credits and we are seeing a lot more constructions and loan approvals coming through. With the planning approvals coming through, we are still at record high levels although the February numbers are slightly off but in terms of the trend numbers, they are significant. We are going to see a transition from the trade workers moving into the property space and away from the mining jobs that they were doing and we are going to see that sort of construction led recovery that the Reserve Bank was looking for. They would still like to see general businesses get into the action and start to invest in new buildings, in their people or in their expansion and that would obviously drive the economy forward. So at this point, we are seeing rates on hold probably only more as a time in the market as oppose to when we are going to see those rates to drop.

There are two other important messages that I would like to leave with this rate announcement video. The first one is there was a great three part documentary on ABC this past month and that was on “Making Australia Great: Inside our Longest Boom”. It is recommended viewing for all Australians to get an understanding and an appreciation on how the economy works on a macro level. We’ve enjoyed over 23 years of positive economic growth. We’ve got through the GFC and there is a great insight from the commentator and presenter of that show and I thoroughly recommend it. It should be a compulsory viewing for everyone. So what I’ve done is I’ve put a link to iView and you would be able to get there and watch it. If you are interested in how all these sort of pieces of the jigsaw puzzle come together, it is definitely fundamental viewing. I thoroughly enjoyed it.

In addition to that, I actually want to talk about the property market.

In particular, I want to talk about the Sydney property market. It has become very clear to me that we are now starting to enter what I would consider an entrenched price point in the Sydney market. The fundamentals aren’t quite right anymore in terms of the affordability. So anyone who is thinking about investing in the Sydney market and I hate generalisation because there is still going to be pockets of the market that is going to be ok but generally speaking, prices have gone too far and we are going to give away some of those gains. If you think about it from a property investor’s point of view, do you want to be paying today’s prices now or be paying 2017 / 2018 prices now? In other words, imagine if you’ve held the property for two and a half years and you’ve paid $650,000 for that property now but in two and a half years later it’s worth $650,000. That’s two and a half years of paying interest and not getting any potential returns other than the rental income that you may get. So for me, that market is a no-go zone for the novice investor. For those more sophisticated investors who may take a really long term view and have a 20 – 30 years view on it, it’s obviously not as critical but I would say there is definitely opportunity cost that is going to be lost by investing in that particular market. So be very careful. Melbourne’s not far behind. There are some pockets of the Melbourne property market that I also suspect will give up some of their gains.

In other words, in 2018 – 2019, we are going to pay the same price on what we pay today.

Again, it’s about understanding the opportunities and looking at the right kind of property to buy in this market. Anything that has an emotional attachment to it, in other words, a character home, a character unit that has real liveability and high status score against it, the prices are too hot.

Owner occupiers are buying with emotional wallets and they are paying a premium for those assets. So stay clear of those. We can buy them in the down term, we’ll get them when the market is going towards a downward cycle but I wouldn’t be buying those at the moment. That’s an important message.

A message to APRA if you are listening as well. From a lending point of view, don’t make macro-prudential changes unless it’s to do with the assessment rate. So what I’m saying there is look at assessment rate and say maybe we need to cap how low they can go because that affects borrowing power. For those uneducated, basically, our lender will look at the assessment and they have an assessment rate and they calculate their borrowing power against that. If the assessment rate is really low that means the consumer can borrow more. What I don’t want to see is the assessment rate drops any further and in some cases, I actually want to see a cap. In other words, they are too low and some lenders are allowing consumers to borrow too much. If we do that type of thing, we are entering into a bubble zone. We are not anywhere near a housing bubble yet but those type of activities are going to mean some consumers who are investing in properties now are going to lose money. And they are going to lose big money and opportunity time, so they might not see their losses until 5 – 6 years from now but when they do see those losses, they are going to set themselves back in terms of prospect of creating a self-funded retirement. So, it’s time for caution in the property market. Speak to professionals, get advice, understand the fundamentals and when a market place is cooked, we need to move to the next marketplace.

Thanks for watching.


(Those people watching/reading this should be reminded this is an opinion comment by Ben Kingsley, and should not be used when making decision about financial matters without seeking further clarification and understanding of your own personal circumstances. This article is not advice you should rely upon. I recommend you speak to one of our licensed professionals before taking any action with your financial affairs.)

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