RBA Rate Decision – October 2013

Although the RBA still had scope to move the cash rate lower, in line with many economists’ view that rates would continue to fall, the RBA board chose to leave the cash rate on hold at this month’s meeting today. This leaves the cash rate at 2.5%.

Many economists are still talking about the cash rate hitting 2 percent at some point into 2014, with one rate cut this side of Christmas, with November looking the likely month. I’m in their camp, but only just. I too think that if no good economic news appear in October, then I’m tipping a November rate cut but I’m not as bullish on any further cuts next year. So, I’m punting on the cash rate bottoming at 2.25%, and it turning upward slightly at some point in the second half of 2014.

One thing I do know and applaud is the way in which the RBA has adopted the use of mass media to get its message out. In many cases, firstly under the stewardship of Ian McFarlane and now under Glenn Stephen, the RBA has effectively used the media to do some of its work in managing the economy, without having to actually adjust rates.

My current example of this very fine work came to light in the past couple of weeks, with all the talk about a housing price bubble. I’ve mentioned before the risks that may come with very low interest rates. The perfect example of this is the case in the US – Super low rates and relaxed lending policy saw prices in the US rise 60+ percent in a very short period of time, only to then see them fall by almost the same amount. In effect, it was this asset bubble that saw the GFC materialise in the real economy.

Now the RBA are super fearful of any level of bubble event occurring here in the real economy, because property and household cashflow and wealth are the pillars of any economy, considering the spending or savings that occur within households are what makes or breaks an economy.

So the recent property market activity is very concerning to the RBA. They can’t afford to have values rise too quickly because this will force their hand to put the cash rate up. Yet they know they still have other structural issues they need to deal with through lower interest rates, such as the value of the Australian dollar and business investment/lending to get the economy moving again.

With all this in mind, they smartly hit the media trails to warn the public to be very careful when entering the property market not pay too much for what they are buy. They used the media to cool the property market so they could continue to do the work they needed to do with monetary policy. And it’s a really good message re: property because in a broader sense we, as a country and an economy cannot sustain property values growing too fast across the entire marketplace. It’s just unsustainable.

That being said, you all know I’m a property man, so it’s important I clarify this statement with some balance.

History tells us that unusually low interest rates increases two things – people’s interest in buying property, because they perceive it will be easier for them to afford and increased borrowing power. This is a dangerous cocktail for first home buyers looking to enter the market in the mortgage belt, as it is these outer ring and new estate areas where values overshoot themselves and cause all manner of strife when rates increase and demand tappers off, yet supply continues resulting in a smash in value.

Interestingly, property and suburbs closer to the cities do much better. Sure they too will see values come off from the peak of the market cycle, but they don’t have the same issues around oversupply or affordability as suburbs on the fringe of the city.

Therefore if you are considering buying and are looking at new estates or city fringe locations, be extremely careful. Study your market well. Understand the value’s movements and just be a little bit more cautious, as competition is heating up. Don’t get emotional or impatient, as it will cost you.

Similar rules apply for that looking closer to town, but it’s highly unlikely that we will see values decline in view of the rises we are currently experiencing and will continue over to the first half of 2014. You do need to be active if you want to get in and there is no such thing as a bargain out there in this market at the moment. Supply of good existing stock will be hard to come by and will definitely have competition on it. You need to be at the top of your game or get someone on your team who can give you an edge, like one of our buyers’ agents.

 

(Those people 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.)