THE NEW RBA 1.5% RATE: WHAT THIS MEANS FOR AUSTRALIAN PROPERTY INVESTORS

Aug 12, 2016 | Australian market, Interest Rates

As I speculated last Monday, the June quarter CPI report gave the Governor enough ammunition to act.

The Reserve Bank said a rate cut will create “room for even stronger growth” as the inflation rate is set to remain below its target range and risks in the housing market abate. read more..

The Reserve Bank of Australia (RBA) reduced its official cash rate to a new record low of just 1.5 per cent at its August board meeting.

We expect this move to stimulate the country’s property market further, given that the RBA’s decision to trim the rate was mainly aimed at stimulating the economy and boosting employment. Notably, inflation data for the June quarter showed that consumer prices increased by only 1 per cent year-over-year. This pace was well below the Reserve Bank’s target of 2 to 3 per cent.

What’s remarkable in the RBA’s recent rate cut is that the monetary agency has apparently adopted a relaxed stance about the east coast’s housing market. Reserve Bank Governor Glen Stevens was quoted as saying in the rate cut announcement that home price increases are “rising only modestly” so far this year, thus allaying some fears that the Australian real estate market is overheating.

Stevens also noted the apartment construction boom in the east coast cities which would boost housing supply in the next two years. In this context, upward pressure on prices can be expected to diminish and hence the need for the rate cut to pump-prime borrowing as well as consumer spending.

The RBA governor likewise stressed that lending growth in housing has slowed somewhat this year. This slower pace suggests that the probability of lower interest rates increasing the risks in the housing market has lessened.

Prospective property investors and home loan borrowers who wish to take advantage of the recent interest rate cuts, however, need to be selective and shop around for the best products and rates. The same is true for homeowners with mortgages, as not all banks are passing the recent RBA rate reduction on in full.

The big banks, in particular, are passing on less than half the cut. The reduction in interest rates ranges from 10 basis points (NAB) to 14 basis points (Westpac). Notably, NAB and the other big banks passed on the full cut when the official rate was cut in May this year.

At least one smaller bank, on the other hand, passed on the rate cut in full, while customer-owned Bank Australia trimmed its standard variable mortgage rate to 4.74 per cent. It is therefore vital that people with mortgages re-examine their current home loans to check how much of the interest rate cut is being passed on to them.

In one estimate, some $16,000 could be slashed over the entire life of a $300,000 mortgage having an average variable rate of 4.93 per cent which received the full 0.25 percentage-point interest rate reduction

Offset mortgages likewise present windows of opportunity for prospective investors and property buyers. Blending a traditional mortgage with a deposit account now looks quite attractive as together with the rate cuts, major banks are passing on a rate increase of as much as 50 basis points on new term deposits.

Moreover, here’s the thing. There are expectations that while interest rates may remain steady at 1.5 per cent this year, the RBA could cut the rates twice more during the first half of 2017. We are certainly abreast of these recent market developments and definitely have more to share on the opportunities that the current RBA interest rate regime presents to investors.

Best Regards

Dr Andrew Unterweger

MBBS, CFP®, Dip FP,FPA, AFA, SMSF
Chairman

Rate Cut or Not ?

Aug 1, 2016 | Australian Property Investment, Interest Rates, Newsletter

Rate Cut or Not ?

Commentators are divided as to the likelihood of the Reserve Bank of Australia announcing another interest rate cut in August, especially in light of the June Quarter CPI report that has just been released.

The uncertainty surrounding Tuesday’s decision is reflected in the market, where pricing for a rate cut is about 50-50. The vast majority of economists still expect an easing.
In general, the market tends to get the RBA right rather than economists but we also need to look at what the market thinks via the strength of the Aussie Dollar which is trading near its recent highs above 0.76 USD.

I believe the RBA has sufficient data to warrant a cut to 1.50 % but can also see a delay till November as the Housing Market has been showing some resilience in the last quarter, even with APRA and the banks tightening credit policy to limit the amount of investment lending being made available to property investors.

Its interesting to note that we live in a world that is awash with QE but there has not been any market commentary on the possibility of the RBA actually using anything else than monetary policy to stimulate the economy.
It is reassuring to note that the RBA have considered what lessons can be drawn for Australia by looking at the experience of other Central Banks in the US, Japan and Europe that have adopted various methods of deploying monetary stimulus beyond rate cuts.

In contrast to where central banks see the state of their economies in terms of trying to stimulate growth, global markets are surging again after a short correction post the Brexit vote and asset price growth continues unabated as investors continue to chase yield.

This state of affairs does make the decision to invest in quality Australian residential property assets a far more reassuring one, especially when borrowing in AUD to fund these purchases.
We need to remain focussed on what the research can show us and not chase assets that have seen too much short term price appreciation in this cycle.

Always remember not to lose sight of the fundamentals as that will reduce the chances of making the sort of mistakes that many investors tend to make.

Let’s see what Tuesday brings us !

Best Regards,
Dr Andrew Unterweger MBBS, CFP®, Dip FP,FPA, AFA, SMSF
Chairman

bloomberg

Aussie Inflation Delivers RBA Smoldering, Not Smoking Rate Gun The gasps following the previous inflation release were absent this time. Consumer-price growth in Australia remained subdued in the second quarter, but not as weak as some economists feared. And it didn’t suggest the country was being dragged even further into the disinflation vortex. So while most economists are sticking to their prediction the Reserve Bank of Australia will cut interest rates in six days’ time, the couple who changed their calls presented compelling cases for doing so… Read more

RBA’s sober assessment of the labour market and housing: Westpac’s Bill Evans

The minutes of the July monetary policy meeting of the Reserve Bank Board confirmed the importance of next week’s June Quarter inflation report. The key sentences in the concluding paragraph of the “Considerations for Monetary Policy” section state: “The Board noted that further information on inflationary pressures, the labour market and housing market activity would be available over the following month and that the staff would provide an update of their forecasts .. Read more

Australia’s Central Bank Would Mix Stimulus Tools in Extreme
Scenario
Australia’s central bank has studied the examples of unorthodox policy conducted by its peers, and would favor a multi-pronged stimulus if economic conditions unexpectedly deteriorated to the point where it had to head into uncharted territory.The Reserve Bank of Australia currently still has room for traditional interest-rate cuts, with its benchmark at 1.75 percent. However, economists anticipate another reduction as soon as next month, and Deputy Governor Philip Lowe — who will take the RBA’s helm in September — has indicated that lowering the rate on its own would lose effectiveness as it approaches 1 percent..

Focus Shifts to AUD/USD Amid Bets for RBA Rate-Cut
Talking Points:

– AUD/USD Preserves Near-Term Bullish Formation Ahead of RBA Rate-Decision.
– USDOLLAR Extends Losses as 2Q GDP Report Disappoints.

Even though AUD/USD largely preserves the upward trend carried over from the end of May, the near-term outlook remains clouded amid the divergence in the Relative Strength Index (RSI); need a break of the bearish formation in the oscillator to favor a larger advance in the exchange rate. Read more

Headline inflation at weakest annual pace in 17 years

Headline inflation has unexpectedly slowed to the weakest pace in 17 years, ramping up speculation the Reserve Bank of Australia will cut the official cash rate to 1.5 per cent next week.

The consumer price index rose 0.4 per cent in the June quarter from the previous three months, and 1 per cent from the same period a year earlier, the Australian Bureau of Statistics said on Wednesday. Economists surveyed by Bloomberg News had forecast inflation of 0.4 per cent and 1.1 per cent.More importantly, measures of so-called core inflation that are closely watched by the Reserve Bank showed price weakness continues to be soft, exacerbated by the lowest wages growth on record, the ongoing deflationary impulse of a sluggish global economy, and a lack of pricing power by retailers in..

Meet Dr Andrew Unterweger

Dr Unterweger is a highly qualified financial and property adviser, experienced venture capitalist and successful investor

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