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Ben Kingsley Blog post by Ben Kingsley

RBA Rate Decision – October 2016

Today the new Governor, Dr. Phillip Lowe and the Board met and they’ve kept interest rates on hold. Now this was widely anticipated by most economists. There were, however, a couple of economists who were looking to see a rate cut. I think that had a lot to do with our stubbornly high Australian Dollar with the Fed Reserve in the US not moving on interest rates over there; our dollar is certainly higher than where most of us would like it.

So that was potentially the trigger for lowering the cash rate but on the whole, GDP looking fairly good, with a 3.3% growth, year on year. We can’t complain about that compared to what’s happening to the rest of the world. In addition to that, commodity prices have come off their low cycle and that also meant that we see oil prices rise a little bit higher. I think that will flow through to some of our inflation data and the Reserve Bank will be happy to see some inflation in that sort of 2 – 3% bandwidth.

Now that said, we also got some developing story coming around Deutsche Bank. Now Deutsche Bank was the biggest bank in the world and now they are really struggling at the moment. They’ve got a real problem. They’ve been fined in the US and they’ve got a $14 billion penalty yet their market capitalisation based on their share price is around that $14 billion mark. So they will need to be something that will go on there and there may have to be some intervention from the government of Germany to try and stabilise that because it could be a contagion as we saw with the GFC.

I mean, if you put this into context, Lehman Brothers has a very small market cap compared to the size of Deutsche Bank so it’s important that we see something done to stabilise the financial system.ma

It is an interesting time. We will see those development come out, it is Tuesday today so it’s important to understand what happens in the course of the next couple of weeks in regards to Deutsche Bank. So watch that closely because that may trigger a rate cut here if we do see that contagion and we see that market start to collapse around the financial fabric that we’ve got at the moment.

Now, coming back to the Australian Property Market. This low-interest rate cycle is causing Dr.Lowe some concern around property prices and it’s well documented that there were some interventions back in August of last year in terms of slowing down the property market and slowing down property investors. And I think that concern is now raised again when we see the auction clearance rate that we are seeing at the moment. Melbourne and Sydney are growing. Property prices are growing in that area and that is definitely a concern for the Governor and the Board. They will look at APRA to try and do something about that. Make no mistake, I think we will see further intervention if we still see the property prices growing too fast because it is unsustainable especially when we are talking about markets on the fringes of the city where property prices shouldn’t be growing that quickly.

So it is really a concern. Now for investors and obviously, all of us as property investors, we just have to understand that we are playing the long game. In terms of where we are buying that property now and the price we pay for that property is a really important point. At the moment, we can say that that is a fair market value when a willing buyer is prepared to buy from a willing seller but what is considered as a real value? What is the true value of those properties? I think we’ve extended beyond that in terms of what I think the true value of assets is. Be very careful if you are looking at buying house and land packages. You’ve heard this warning before, medium and high-density apartments are coming off. We already see the valuations of some of those property dropping so you need to be very particular around what you’re buying and also more importantly, where you are buying that property. Melbourne and Sydney do face their challenges; naturally, there are still pockets in those markets that we think are worth buying in but there are more pockets than not where we would say, please avoid and don’t get caught up in this cycle.

We need to be countercyclical. We need to be buying when the market is lower and where you see an opportunity or move into another market to become that borderless investor. Thanks for watching.

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