RBA Rate Decision – June 2017

The Reserve Board met today, and they kept the cash rate on hold for another month at 1.5%. Now we saw May 2017 being a very interesting month in regards to the Federal Budget. It came out, and we did see some surprises inside that Federal Budget.

Firstly let’s talk about the Bank Levy. This is all to do with what they call budget repair and it’s basically a levy on the banks to raise a considerable amount of money to try and bring that budget back into surplus. That will have a flow-on effect when we talk about the share market. Some banks went down by 10% in May, but the overall ASX Top 200 dropped by 3.4%, so it’s a tough month for the equity market. On the other hand, when we come across to the property investors, what we saw in the budget was no changes to negative gearing which we anticipated and also the capital gains exemptions didn’t come through as well. So that was all good news but what was a surprise were two things. Firstly, obviously travel costs. A ban on claiming travel expenses to go and inspect your investment property. That was a surprise, and I thought that was a bit harsh. I suspect what they should have done was maybe put a cap on how much you can actually claim as a deduction against travel because if I’ve got a million dollar asset in Sydney and I want to go and have a look at that asset, I should be able to claim some of those costs. But again, we don’t like roding and if the government and the tax office felt that there was roding in that, they will just put on a blanket ban. So hopefully we can change that over time. The other one which was a big surprise was depreciation. We did see that come out of left field where we’re seeing that the actual fixtures and fittings of a property will no longer be able to be claimed on existing property for those people. In that respect, we’ve actually done a podcast on this at The Property Couch where we speak with Bradley Beer, who is a leader of BMT Tax Depreciation and Quantity Surveyors. Check out that podcast if you want more details in that area. It hasn’t been legislated yet so we’re hoping that there might be some changes to that but it was certainly unexpected so do check out that episode at thepropertycouch.com.au.

So that’s what’s happened in May. Now what is exciting to announce is, as of tomorrow, we get to see our GDP numbers. That’s the gross domestic production. We’re talking about the March quarter, and we had a positive December quarter 1.1% growth after a negative 0.5 of 1% in September. But what we have seen is we’ll actually surpass the Netherlands as the longest country in history where this has been tracked of positive economic growth.

A technical recession is two negative quarters and since we had a positive quarter last time, even if we have a negative quarter this time, we will actually pass them.

Hopefully, it will be positive but there is some commentators and economists out there who think we’re going to have a negative quarter and the main reason behind that could be Cyclone Debby. The coal mining areas of Northern Queensland and also the floods that come through. Because what we need to understand with GDP is half of GDP is made up of retail spending so that’s us getting out there and spending money. Well if we’re locked in by the floods and hard to get access to things and at the same time, we’re not exporting goods because our ports are closed, or our mines are flooded those types of things have an impact. So we may see a negative quarter tomorrow. That being said, hopefully the economy is moving in a positive direction, but it is a line ball discussion. We’re certainly not growing at that 3% that we’d like to be growing at and that obviously is going to be a challenge for the economy and a challenge for confidence because we did see a positive read on business confidence and that’s always good. Last month data on retail spending was also a real positive where it went up 1%. That is really good considering that we actually had recent periods of time we’ve had some really sluggish retail sales. I expect that to also have an excellent month in June and the reason I believe that was the case is that the other thing we saw in the Federal Budget is incentives for small businesses. Small businesses can spend up to $20,000 and claim that immediately if their turnover is less than $10 million. We are seeing businesses out there who will take advantage of that and go to the Harvey Norman’s and maybe buy new computers and some upgrades or they might get some new furniture for the offices. That is a positive thing and we’ll hopefully see that flow through the numbers in terms of retail spending. Again that links into positive economic growth and that’s good for the economy.

However, we’re also seeing that the Reserve Bank still has a major issue when it comes to household debt. Whilst the value of our property is growing, we are very confident and we spend. It’s called the wealth effect. We go out and we spend money because we feel like our net worth is high. We feel like we’ve got job security so we get out there and spend money. That is a real positive when it comes to those types of situations but what if it was a negative? This is what the Reserve Bank is trying to grapple with right now with slowing down the property market. It needs to slow down the property market gradually rather than sort of having that steep correction. Why is that important? Because if the wealth effect was in reverse we would stop spending and when we stop spending, we stop employing people because retail jobs make up a considerable part of our broader economy. And when we stop spending we will also stop building new homes and the trade and construction sector starts to slow down. We potentially can go into a deeper correction and go into that recession. How deep that recession can become all comes back to our confidence, our sentiment in terms of how the market is going to look. Now we’re going to be bombarded in the media with you know a boom-bust scenario. We’ve had this boom story for the last few years and potentially we’ll start to see stories coming out about property bust and probably prices correcting. Now if we all believed that story on mass, the reality is we will be self-perpetuating a recession. Because we’ll believe it and as we believe it, we’ll basically close our wallets and we don’t spend. And so that deep recession could actually materialise if it is up to us.

So it’s important to understand that the Governor and the Reserve Board understand this intimately and that’s why they’re trying to tweak the market through little subtle changes to slow down the appetite for residential property at the moment. That is a sensible move, but it’s also up to us to make sure that if we do have a little bit money there to continue to keep living and enjoying the things that we’re doing while also you know keeping a little bit aside. And for those households who are spending beyond your means or you’re using credit cards and living the good life you’re the one who needs to pull those purse strings. You need to slow down the appetite for discretionary spending and the Need It Now type attitude because if we can get that right we can navigate through this period and we can continue this amazing journey of positive economic growth. And obviously, that means prosperity for you, me and the nation.