Tuesday, February 5, 2019

Why the RBA holds cash rate at 1.5%

The first day after the Hayne Royal Commission on the Banking sector, the Reserve Bank has chosen to keep interest rates at 1.50% today. Here is their statement - At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. The global economy grew above trend in 2018, although it slowed in the second half of the year. Unemployment rates in most advanced economies are low. The outlook for global growth remains reasonable, although downside risks have increased. The trade tensions are affecting global trade and some investment decisions. Growth in the Chinese economy has continued to slow, with the authorities easing policy while continuing to pay close attention to the risks in the financial sector. Globally, headline inflation rates have moved lower due to the decline in oil prices, although core inflation has picked up in a number of economies. Financial conditions in the advanced economies tightened in late 2018, but remain accommodative. Equity prices declined and credit spreads increased, but these moves have since been partly reversed. Market participants no longer expect a further tightening of monetary policy in the United States. Government bond yields have declined in most countries, including Australia. The Australian dollar has remained within the narrow range of recent times. The terms of trade have increased over the past couple of years, but are expected to decline over time. The central scenario is for the Australian economy to grow by around 3 per cent this year and by a little less in 2020 due to slower growth in exports of resources. The growth outlook is being supported by rising business investment and higher levels of spending on public infrastructure. As is the case globally, some downside risks have increased. GDP growth in the September quarter was weaker than expected. This was largely due to slow growth in household consumption and income, although the consumption data have been volatile and subject to revision over recent quarters. Growth in household income has been low over recent years, but is expected to pick up and support household spending. The main domestic uncertainty remains around the outlook for household spending and the effect of falling housing prices in some cities. The housing markets in Sydney and Melbourne are going through a period of adjustment, after an earlier large run-up in prices. Conditions have weakened further in both markets and rent inflation remains low. Credit conditions for some borrowers are tighter than they have been. At the same time, the demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed. Growth in credit extended to owner-occupiers has eased to an annualised pace of 5½ per cent. Mortgage rates remain low and there is strong competition for borrowers of high credit quality. The labour market remains strong, with the unemployment rate at 5 per cent. A further decline in the unemployment rate to 4¾ per cent is expected over the next couple of years. The vacancy rate is high and there are reports of skills shortages in some areas. The stronger labour market has led to some pick-up in wages growth, which is a welcome development. The improvement in the labour market should see some further lift in wages growth over time, although this is still expected to be a gradual process. Inflation remains low and stable. Over 2018, CPI inflation was 1.8 per cent and in underlying terms inflation was 1¾ per cent. Underlying inflation is expected to pick up over the next couple of years, with the pick-up likely to be gradual and to take a little longer than earlier expected. The central scenario is for underlying inflation to be 2 per cent this year and 2¼ per cent in 2020. Headline inflation is expected to decline in the near term because of lower petrol prices. The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Thursday, November 1, 2018

Perth house prices down, units down 20% since 2014

Recent figures released by CoreLogic shows that the Australian property market is the worst that it has been in the last six years. Perth continued to slide with house values dropping 0.8% in October which is a 2.9% drop in the past year to date.

For units, the news is even worse. The drop is 1% in October contributing to a year to date drop of 5.2% and a whopping 20% since 2014! The real estate market has had many things going against them in the past few years, including the recent royal commission into banks leaving them wounded and less likely to lend large sums out. There is also the crackdown on overseas investment into real estate, and the Chinese government targeting funny money being siphoned out of China.

Sydney has seen a drop of 8.4% over the last year and Melbourne has dropped 6.3% in the same time following their stellar performances over the last 10 years. With interest rates going up in the US, there could also be more slowdown here as the risk of interest rates rising here increases, affecting investors' appetite for further investment.

Friday, August 10, 2018

Return of the first home buyer?

All around Australia, the real estate market is looking for the end of the correction but there is no end in sight. One piece of good news comes from the Constant Investor which showed that the first home buyers as a proportion of all housing loans has increased to a six year high.

There are two ways this could happen, one is that the proportion of investor loans taken has decreased, or the first home buyers has increased. We think it is more likely that investors are not taking up as many loans. Banks are under enormous pressure to improve their lending practices which means lending out more carefully. Also with a bear market, investors are also hesitant to buy but first home buyers often have no choice if they need a house. So what do you think?

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