RBA Rate Decision – February 2016

Today the Governor and the Reserve Board met and they’ve kept interest rates on hold for the first meeting of 2016. Now that keeps the cash rate at 2% and we haven’t seen the change in the cash rate since May last year.

Now the big news of the turn of the calendar year was actually the share market and the jitters that we saw run through those markets. In fact, it was the worst start to a calendar year ever recorded across global equity market. So we have real concern out there and we’ve got this real high volatility around what’s happening in the share market at the moment. I think that’s mainly led by the China’s story in terms of exactly what’s happening in China. Second biggest economy in the world anticipated to become the biggest economy in the world but they are just struggling to transition from an exporting nation to basically a consumption nation. So, we’ve seen the Chinese Government trying to do a lot to curb those jitters. The marketplace and the Shanghai Index has been bouncing around and that has obviously cause a lot of concern and sentiment shift around the general economy. When we see markets do that, people become quite reserve and they don’t spend as much. So that’s basically what we are seeing. If they are seeing their fortunes being wiped away, that’s a real challenge. So it has been a difficult start for January in terms of the share market and globally, it has been a challenging time for what’s been happening out there.

So that’s probably the negative component. Let’s move to local market. And what we have in Australia is really what I would call a steady economy, sluggish but steady in terms of we’re tracking in the right direction. We’ve got unemployment still under 6%. We’ve got things happening around consumer spending, most people reported a fairly positive Christmas and Boxing Day sales period. We’ll see those results coming through shortly. We’ve also just starting to see some early indication on what’s happening in the housing market.

If we do a quick fly around, we see Melbourne has done quite well in the January period. Now, again, it’s a small sample because it’s not an active time that property is being transacted in the January market but we’ve basically seen Melbourne has a positive results. We’ve seen Sydney have a steady results. Hobart in particular has a very strong January period maybe it’s because of people who are holidaying down there thinking they can buy a bargain and certainly fro an affordability point of view, Hobart looks very affordable. Canberra, again a really good result for Canberra. We are starting to see some of the oversupply being absorbed so Canberra is potentially a market to watch. Brisbane had some positive numbers and even Perth have had a rolling positive three quarters. Darwin again, still a bit sluggish. So for me, across the nation I don’t think we will see the growth levels that we saw in 2014 and 2015 for the Sydney and Melbourne market. But I’m also not predicting that we are going to see a big correction in those markets. There are going to be markets that I’m seriously concern about and that is the median and high rise apartment market. There is going to be an oversupply in those markets so I’ll be really worried if I were an investor or a buyer in those market. So I don’t think value will hold its current level but certainly, if you’ve got land or you’ve got construction or building on that land, 3 and 4 bedroom houses, those kind of properties are still in demand. So I suspect we’ll see some growth in those areas especially if the economy is starting to move. Now I also want to talk about what’s going to happen to interest rates through out 2016.

If the world was normal, I suspect we’ll see interest rates on hold for a reasonable extended period of time potentially right through 2016.

But here are my two caveats.

If we see APRA with more market interference and the Banks arguing that they need to hold more capital as part of their BASEL 3 global requirements then I suspect you may see an out of RBA increase again. So these lenders, taking their opportunity to increase their margin as they are getting sluggish business profitability, it’s all falling on the residential borrower. So that does worry me a little bit and concern me that we might see interest rates move higher in the residential space. That could give the RBA the ability to pull the lever a little bit lower in terms of the cash rate. So if, the Reserve Bank is seeing that residential lending is still pushing high and the banks do do that out-of-cycle increase, the Reserve Bank would pull the lever lower which means that business lending won’t be affected and hopefully, we would see some stimulation inside the business community which would eventually, generate jobs. The RBA is really interested in increasing the number of people working and what we call the spare capacity in the labour market. That’s what they are looking to do. So all in all, I think it’s going to be a softer year from a yield perspective back in the housing sector. Yield has never been lower in terms of rental increases so we’re going to probably see a period of this. We are seeing Melbourne and Sydney particularly, a very strong growth pattern for the last sort of 10 – 15 years. We’ve never seen the growth rate in rental going so slow. So once you’ve seen the plateauing of value, you’ll start to see those rents rising as well. So a very difficult market for 2016 to be picking the right kind of asset, so I would suggest you get some professional advice, understand the numbers that you’re looking at, days on market, supply is the big conversation, average day discount, demographics, income and those type of things. Go back to the fundamentals in terms of getting price growth in particular pockets around the Australian property market. Thanks for watching.