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Ben Kingsley Blog post by Ben Kingsley

RBA Rate Decision – February 2017

At the first board meeting of 2017, the Reserve Governor and the Board met and they’ve kept interest rates on hold. It’s been a while since we last caught up you know. We last met in December so there’s been a lot of data that I’ve wanted to share with you and talk through, and a lot of developments that have been happening in the housing market.

So to start with, I want to focus on unemployment. We saw at the end of December that we could have a look at the annual rate of employment growth. We saw the annual percentage change from 5.7% to 5.8% which meant, that basically, unemployment had risen. Now, what is there the cause for that? What normally happens is university usually finishes in November, people start applying for new jobs. That puts a little bit of a spike around that. What has been interesting, in 2015 we created 297,000 new jobs. Now this year, at the end of 2016 sorry, we only created another 91,000 new jobs. That’s obviously going to be quite concerning. In addition to that, we are still seeing some trends around full-time work vs. part-time work or casual work. It’s also going to be challenging. We also want to see more people in full-time employment and that’s what the RBA talks about regarding spare capacity. So is everyone working to their capacity? And at the moment, that’s definitely not the case. And that’s also the reason why we haven’t seen any wage growth or wage breakouts. That’s also factoring in terms of, when you look at the overall economy, the inflation level is actually quite low because the economy is still sputtering along there, it’s not sort of hitting its straps yet. That’s why we see inflation like that.

So the reserve governor and the board are thinking, “Alright well that’s something we need to look at”, and a lot of the commentators are saying for this year, if we see really, really low inflation, that could force the governor and the board to actually drop interest rates lower. Now my opinion is they are going to be trying to counter balance that with the property market. The problem they have right now with the property market is, prices are still going harder. And the other big problem that we have is too many investors looking to jump into the property market. Now obviously, we are a property investment business, and so we absolutely want to see people making smart decisions about buying the right locations at the right time. And we’ve definitely seen you know, conversations of late, around housing affordability. This is a political dynamite. This is dangerous territory and what I want to talk to you about is, check out our podcast, The Property Couch, I’m going to be talking a lot more about affordability on the next podcast which comes out on Thursday afternoon.

The challenge we have here is, the affordability story isn’t around Australia, it’s really around and centred in on Sydney, to be honest. Even Melbourne has decent affordability in some areas. It’s just the understanding that people are looking for when wanting to buy the inner city area and basically see inner city properties to be more affordable. But we’ve got to be realistic about that.

The reality is that in other nations around the world in the big capital financial hubs of those countries, housing affordability is also challenging and they don’t have things like negative gearing. They don’t have those types of challenges, yet we do see human interest and human behaviour, wanting to live close to all the amenities and all the different things that are available to them and they’ll pay a premium for that. So I haven’t seen any government in the planet solve the affordability crisis on mass. There are some opportunities to solve around better infrastructure, fast train transports to different potential nodes, building hub city centres in big capital cities. So there are a few things we’ll be talking about in the podcast so please check that out.

Some of the other data that has been coming through in January was the data on retail sales. Annually, we’re looking at retail sales up around 3.2%, but it was only slightly up in December, so it also says to us that there is still some confidence in the marketplace which is a good sign further into the 2017 future. But what is important to understand is we also got another kick up from the trade surplus as well and an amazing trade surplus of around $3.5 billion! Now we need to go back to 2009 for those sort of numbers. Incredible numbers! And that’s the result of 2 things: We are shipping a lot more volume of iron ore and coal, into our trading partners; but also the rebound prices from the historical lows we saw in early 2016.

So that’s a good new story for the government, and hopefully, a bit of revenue come through but then we’ve got to look at the Trump Story that’s going on at the moment with regards to world trade. Now if we did see Trump continue on his little agenda, and starting to look and pick on areas such as Asia, particularly China, around the amount of imports they are receiving, we’ll have a kick on effect to Australia. We will see less iron ore and less coal being needed and as potentially as the economy slows. So again we are evenly balanced, I do believe interest rates will remain on hold for the remainder of the year. Currently looking at the environment, there are arguments for potentially lower interest rates around inflation, so keep your eyes on that. The other thing we also need to see is exactly how world trade starts to take shape if we are going to go to a protectionism type environment, such as the Brexit and also what’s happening in the US. Well then the reality is that’s recessionary. That is dangerous for all nations because you know, Australia just to give you an idea, we export 50% of the wine we produce, we basically export 2 thirds of all the natural wheats and all of our food production is exported. So we are a nation that relies on those types of jobs. Coming back to the construction side of things, if we round this out and we look at the construction story, if we’re going to see a slowing of medium and high-density accommodation, that’s also going to affect our construction jobs and those kinds of things as well. So it’s delicately poised and that’s why I think Interest rates will remain on hold for 2017.

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