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Ben Kingsley Blog post by Ben Kingsley

RBA Rate Decision – April 2017

Today Governor Lowe and the Reserve Board met, and they’ve kept the Cash Rate on hold at 1.5% for April 2017. Now there is a lot of commentary on the marketplace over the last month around property, and I want to get to that in a minute. Let’s just quickly wrap up what’s happening in terms of the world market and mainly the US. We did see the Cash Rate move up in the US so Janet Yellen and her team have put the cash rate up to 1%, and we expect to see, possibly two more movements as their economy starts to gain more and more traction. You know, they are really low on employment over there so this is possibly a reasonable story. We also obviously have to see what President Trump is going to do with regards to his tax policies and his economic infrastructure plans. Once we start to see those moving, the US economy will start to look good. Their equity markets have been unbelievably strong, so that’s been interesting to watch, and I think the broader global economy is looking reasonably well placed for prices, iron ore prices sitting high, you know that type of thing gives a little bit of confidence in terms of world trade and so forth.

So we move on from the world markets, let’s focus in on the Australian markets; namely property. I’m going to spend a fair bit of time now just trying to talk to you about what’s happening in the property market. Now, we did see in about August 2015, APRA (Australian Prudential Regulation Authority) intervene into the marketplace by putting speed limits in place for how quickly Investor Loan books can grow. So they said to the banks, you can’t grow your loan book by more than 10% per annum. That obviously meant that the banks had one hand tied behind their backs to do business in that space. Now, why were they doing that?

Well effectively, I’ve mentioned this before. The RBA needed to knock on their door and work out ways in which they could slow down the number of investors getting into the property market. We investors have been very good in terms of picking the right investment to invest in, in terms of residential bricks and mortar. But there is definitely an elevated level of investor activity namely in Sydney and Melbourne. When you’ve got that level of economic activity and strong buying interests in properties, we start to push prices too high and the RBA completely understand the consequences if we see a property market collapse. The flow on effects from that is right from throughout the economy. We look at the GFC but the catalyst for the GFC was the US property market getting too ahead of itself. We saw interest rates at a very low level and basically, very easy lending going on out at the marketplace. So, APRA is the lever that the RBA are using to try and slow down the amount of debt going into the marketplace for investors. We’ve got owner occupiers with their Fear of Missing Out because property prices are going up really high, and then you’ve got the investor market also coming in there as well. And that’s why we see these record growth rates in regards to property prices.

Now they are not at the very highest levels that they have ever been at but this positive price growth period is almost 5 years in both the Sydney and the Melbourne markets. That is frankly unsustainable, so they’re trying to slow down that appetite and we expect to see APRA further intervening around what they’re going to do. I suspect that speed limit of 10% will probably be moved back to maybe 7.5%, possibly even 5%, that’s one way they can do it. The second way they can do it is where there is an assessment rate that sits above the retail rate that you and I pay as borrowers. Now that assessment rate is usually 2 or 2.5% higher than what we are paying. Why do they do that? Well, the banks want to make sure you can repay the loan when interest rates go up. When you set that assessment rate higher, it actually impacts the money you can borrow. So if you can’t borrow that much money, there may not be an appetite for investors to get into the market, so we expect they may bring in some type of higher assessment rate for investors as well.

That is also correlating to what banks have been up to in the last month and I said this earlier in previous videos that I expected the banks to start lifting rates outside of what the Reserve Bank was doing with regards to the monetary policy. And we’ve seen this, this month again. We’ve seen owner occupiers have small increases in their retail rates that they are paying. But we’ve seen investor loans absolutely be hit with a full rate rise of around 25-30 basis points. Now if you’re also running interest only loans, we’ve also seen the banks put more pressure on those people who run interest only loans. As a property investor, that disappoints me. It disappointments me for all the clients we look after because the reality is, is that we are big advocates of interest only lending because we want to be in control of the money. We don’t want the banks to be in control of the money and we use offsets to be able to balance that out. So it’s disappointing that again, we are basically tied with the same brush as the 5% or the 10% of risky borrowers in there, and that good reliable borrower have to pay a premium because we are basically setting regulation for that lower score denominator. That’s frustrating for me but I can broadly understand why we are seeing these MACRO prudential changes; because the economy is reliant on what happens in the household. We are the consumers that spend, and that generates GDP so if we do see continued growth rate that is unsustainable, there will be a correction. And when that correction comes, it could be recessionary in nature because ultimately if property prices start to fall considerably, everyone will stop, everyone will panic, and there’ll be a flow on effect and a contingent effect in our domestic marketplace. So on the other hand, I understand what they are trying to do, and I understand the levers that they are working to do that with because you know, when they do that for just property, they are not affecting business borrowings. The business investments that I’m always talking about still need to be in place so it’s a difficult balancing act that the Reserve Bank has to do. They are obviously trying to bring the likes of APRA and ASIC in terms of responsible lending and what’s happening out in that retail land around borrowings and home loans. So it’s really important to understand that.

It’s going to be an interesting time. It’s going to be harder to get finance, and we’re going to see hopefully, that marketplace re-balance itself to a more sustainable level where we get 70% owner occupier and 30% investor. Right now, in some markets we are seeing 50-60% investor and this is unsustainable. When other markets like Perth where property prices are off 25% in most areas, it’s really a strong challenge around so much lack of supply, but the demand for the supply is coming on. So it’s interesting times when we’re in the property space, and that’s why you need to do your research and be a borderless investor. Don’t just look in these bigger markets thinking that they’re the only places where you’re going to see price growth because you know at the end of the day, there is the right time to get into the market, and there’s also the wrong time to get into the market. Take this message to just be careful about what’s going on, speak to your professional advisors, make sure you get some further information about this as it is critical to your personal wealth creation story. Understand all of the risks and rewards associated with investing in bricks and mortar because it’s not a guarantee. Nothing is a guarantee when it comes to investing, so you need to be smarter and more informed. Thanks for watching.

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