You’d have to be living under a rock not to know the Reserve Bank of Australia (RBA) cut the official cash rate by 0.5 per cent last week. Most economists think there is likely to be another one or two cuts later in the year. So what does this mean for property values and investors?
BY MICHAEL YARDNEY
Earlier this year, the RBA left interest rates on hold because they were expecting the mining boom to stimulate our economy. They were worried this may lead to inflation and thought they’d have to balance this stimulus out with higher rates.
However we’re in the middle of the mining boom, billions of dollars are flowing in, mining companies are making huge profits, a small group of skilled labourers are making massive wages, but in general the benefits haven’t trickled down into the economy.
If you think about it, we’ve got a boom and doom economy – while the resources sector is booming, many other sectors of our economy are languishing.
What will lower rates mean for our property markets?
The banks are not going to pass on full rate cuts, but to put things into perspective, each 0.5 per cent drop in interest rates slices about $120 off the monthly cost of an average mortgage. This means more money in our pockets for those on variable interest rates.
Ultimately lower interest rates will be positive for our property markets because it will boost confidence, however it may take some time.
In the past, once rates started falling – and especially if there was a succession of interest rate cuts – property markets would pick up. Established home sales would improve, new housing starts picked up and property values started to increase. But over the last few years the connection between cheaper money and improving real estate markets has been broken.
Why aren’t lower interest rates boosting the market?
While the property fundamentals are improving, confidence is holding back homeowners and property investors. This seems to be slowly improving and falling interest rates will only help.
What’s dampening investor confidence?
It’s a combination of three things:
• Overseas economic issues
• Local political issues
• The mixed messages we’re receiving about our local property market.
Just open up the papers and you’ll see how much confusion there is about what’s happening to the property market. Some say it’s on the rebound, others say there’s worse to come and yet others say the markets are just flat.
More importantly it’s the global economic issues that are affecting the way the average Australian is thinking about property.
Remember we tend to think like investors, but ordinary Australians – mums and dads who are buying and selling their homes – drive our property markets. They’re worrying about:
• What if another financial meltdown occurred overseas? How would that affect me?
• What if the China juggernaut stalls? What will that do to our resources boom and my job?
Right now, our property fundamentals are good: our economy is stable, unemployment is pretty much under control and interest rates are coming down.
In the past low interest rates, strong employment and a solid local economy would have been fundamental drivers that buoyed our property markets, but today the instant news cycle of what’s happening overseas is making outside economic matters far more relevant.
What does the property market need to move forward?
I think we’ll need more than one or two interest rate cuts. We really need some positive news out of the United States and Europe and for the news to remain positive for a while.
Are our markets still falling?
The property research houses have released a slew of contradictory property price data over the past week and they all have different interpretations of what’s happening in the property markets. Similarly, when you ask them what’s in store for our property markets their opinions vary. It’s no wonder property investors are confused.
Why the contradictory results?
I’ve found we always get mixed messages as the property market moves form one stage of the cycle to the next. It seems that we’ve moved out of the downturn stage of the property cycle and are now entering the stabilisation phase of the property cycle when buyers slowly return.
Let’s look at some of the results…
Over the past week the Australian Bureau of Statistics, Residex, RP Data-Rismark and Australian Property Monitors reported their results.
SQM Research tabulated these results as follows:
Of course to make things even more confusing, each state is made up of various property markets, and each is at a different stage of its own cycle.
So what should a property investor do?
With interest rates falling, market confidence returning and the property cycle moving on, it might be a good time to get set for the next stage of the cycle.
It’s a great time to review your wealth creation plans, learn from history and take appropriate action. For some people, buying a well-located property and then letting the magic of time and compounding grow your wealth could be the right answer.
Michael Yardney is the director of Metropole Property Investment Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Investment Update blog