Why has the Reserve Bank decided to hold rates and how does it compare to previous cycles?
BY MICHAEL YARDNEY
By now you would know that the Reserve Bank of Australia (RBA) has left interest rates on hold for the first time in four months, leaving the cash rate at 4.5 per cent.
This was really no surprise, considering rates have moved up six times since last October and are now starting to have some effect.
There’s clear evidence that consumer sentiment has fallen, our property markets are slowing down and some segments of the retail sector are hurting. Add to that the uncertainty surrounding the impact of the new resources super tax and the issues facing a number of European economies, and it was clearly time for the RBA to step back to see how things pan out.
Most economists are expecting rates to remain on hold for a few more months, but what then? Many expect rates to start rising again at the end of the year and a few more times next year.
To see what I could learn from history I decided to look back at what happened in previous cycles.
In a recent report, Craig James, chief economist of ComSec, reminds us that in the last rate-cutting cycle the cash rate fell to lows of 4.25 per cent in December 2001. In the two previous rate-cutting cycles, the cash rate fell to lows of 4.75 per cent. However, one thing that’s different this time round is that due to the after effects of the global financial crisis the cost of overseas borrowings has gone up and the banks have been forced to lift their rates more than the rises in the cash rate set by the Reserve Bank.
It seems the RBA is looking closely at these bank variable housing rates to gauge how close rates are to “normal”. Currently the average bank variable housing rate is 7.4 per cent, which is above the long-term average or “normal” rate of 7.15 per cent.
In fact, in its most recent statement the RBA said: “Taking all the available information into account, the board views this setting of monetary policy as appropriate for the near term”. This suggests that there will be no change in cash rates until much later in the year.
It’s the RBA’s role to keep the economy on the straight and narrow, so looking ahead, if the economy picks up pace, the focus will again switch to rate hikes.
The bottom line for investors is to expect interest rates to keep rising a few more percentage points over the next few years, but they can take comfort in the fact that this will occur because property values will keep rising.
So to win “the game” of property investment you have to budget for higher interest rates and own the right type of property. One that has a level of scarcity which means it will be in continuous strong demand by owner-occupiers (to keep pushing up its value) and tenants (to help subsidise your mortgage); in the right location (one that has outperformed the long term averages) at the right time in the property cycle (that would be now in many states) and for the right price.
Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. Subscribe to his e-magazine at www.propertyupdate.com.au. For more information about Michael visit www.metropole.com.au.