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Ben Kingsley Blog post by Ben Kingsley

RBA Rate Decision – June 2015

Hello, today the Governor and the Reserve Board met and they’ve kept interest rates on hold. Now this was widely anticipated. The facts are, at 2% cash rate, it is at historically low level and if we were to actually move rates further down which we do have capacity to do if you look at the minutes for May 2015 Cash Rate. They are saying that we have the capacity there but in reality that would be an emergency setting. Now, the RBA has recently adjusted our GDP forecast which means our growth and how the economy is growing once again. This is the fourth time they’ve made adjustments. So the reality of the move on the cash rate and certainly following the Federal Government budget release in May has said that we need to get on with business. What does that mean in terms of getting on with business? Look, basically what you saw is a have-a-go budget. The have-a-go means there are a lot of focus on small business and certainly a lot of capex expenditure. So we saw they introduce a $20,000 capex expenditure for this financial year. That’s about getting out and spending.

In addition to that, locally, we saw a real bounce in consumer sentiment.

In fact, its 16 months high that we’ve actually seen in regards to that. It’s been a positive outcome or a positive read around what’s the initiatives inside the budget for consumers. The consumers are going to have to lead this impetus, this momentum into getting the economy moving forward because we do know unfortunately, we are still struggling with the collapse of the CAPEX expenditure that is occurring in the mining sector. We are not seeing spending on infrastructure and we are certainly not seeing, at this stage, that spend inside business. We are not seeing confidence yet in that space. Now if consumer confidence lead us to a retail spending increase as we’ve obviously seen it in the housing market in regards to a very very healthy market in terms of approval. We need that to do some heavy lifting. But we also need the state government to start spending on infrastructure. It’s so important that we get the infrastructure moving because it increases productivity and it gives us longevity in what has been an incredible run in terms of positive economical growth for the past 24 years, almost coming into 25 years.

That being said, I want to focus very heavily on the property market at the moment. We are seeing APRA (Australian Prudential Regulation Authority), now for those who don’t understand who APRA are, they are basically the regulatory authority that looks after the lending sector. Their job is to try and keep it healthy by that, they mean they want to keep a comfortable reserve. Cause if we have a collapse in the financial services sector, basically you saw what happen to the GFC in America, it’s a crazy situation where our economy would fall into a deep recession, probably even a depression. So on one had, APRA is basically doing some smart things.

The smart thing that they are doing is they’ve basically said to lenders, look, we want you to increase you assessment rate which is going to reduce borrowing power. That’s good because what we are seeing in the Sydney market is pure speculation at the moment.

We’ve gone past what is fair market value and now we are getting into speculative buying. Fear of missing out is really creating a frenzy of buying in the market and there are going to be a lot of people who buy property in today’s value term and in several years time from now, the property will worth exactly the same if not lower than what they’ve paid today. I’m very concern about the activities that are happening in the new, established and off the plan space. There are going to be people who are going to lose a lot of money once we see those properties coming online between 2016 – 2018. So, back to APRA. What I’m comfortable with is they have basically change the assessment rate which means borrowing power is a little bit restricted. That’s a good thing to do. But the silly stuff they are doing – some lenders are now dropping LVR, some lenders are changing other aspects around servicing for negative gearing and also the reduction in terms of how much rent you can use to assist with your servicing. That’s dumb. And the reason why it’s dumb is because the only thing, the only market that is thriving is Sydney. Melbourne is not far behind it. Emotional buyers are buying stuff in the Eastern areas which are at a hugely increased value. So I suspect we are going to see some correction in the emotional buying area. If you are taking long term view, that’s ok. You want to be very clear about the type of assets that you are buying for investment in the marketplace like Sydney and Melbourne at the moment. But the other markets are lagging. What I don’t like about what APRA is doing is putting an 80% ceiling on lending or influencing the banks to make those type of decisions is going to restrict activity. Investment activities are going to create direct jobs and indirect jobs once those houses are built, people live in the area, they got to furnish the property, that kind of momentum is going to be important. I get it. I get that Sydney is a very very hot market at the moment and it’s overdone, it has cooked itself. I can understand why we are making some of these changes and I support some of them. But the whole market place, you know, Western Australia, Darwin is on a decline. Canberra as well is a little soft. So we don’t want to be restricting those particular market. Come back and make a cap on the assessment rate but keep all the other aspects of terms and serviceability and credit policy where they were.

I want to wrap up by just saying that the property market as it sits right now with these historical low interest rates, if you’ve been watching my video for a long time, you would understand that I’ve been critical on any type of speculative investing. So you got to be smart about where you are investing. In fact, you got to be a borderless investor. Meaning you shouldn’t be investing in your own backyard cause it definitely runs too much in Sydney market. You need to be a borderless investor and look at other opportunities in those particular markets. That’s my big message for this video.

Also to those people who gave me some well wishes, I’ve been unwell of late. I’ve had an operation on my back and as you can see, I’m standing up and I’m in my recovery phase of that operation so thank you very much for those people who sent me all those get well soon wishes, I’m improving and I’ll hopefully be back to full health really soon.

Thanks so much 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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