Debbie Shankar - 7 Jun, 2016

Rates on Hold, But for How Long?

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eChoice RBA Commentary for June 2016

The RBA have left the official cash rate on hold at 1.75%.

This decision was based on:

o Deflation occurring;

o Slow global economic growth;

o The Australian economy rebalancing;

o Stagnating wage growth; and

o Housing sentiment cooling.

With inflationary pressure lower than anticipated and the global economy growing, but at a slower pace than expected, it’s highly likely that May’s rate cut will be followed by another later in the year. But for now, the Reserve Bank of Australia (RBA) will wait, and assess, how last month’s rate cut of .25% impacts on the economy.

Market Sentiment

Several more advanced economies have seen conditions improve over the last 12-months. However, difficult circumstances have prevented markets from emerging. With a moderating growth rate, China is showing signs of recovery from its recent downturn.

In Australia, commodity prices are firming after substantial losses over a number of years. As a result, Australian trade is much lower than previous years.
The financial market sentiment is continuing to improve after a volatile start to the year. Though global economic uncertainty continues to stall market confidence.

The Australian economy is still in a period of rebalancing after a decline in mining investment. The labour market is continuing to recover, and GDP growth is still increasing, though rates are not as high as anticipated.

National Inflation Figures

Inflation has become much lower than expected, for some time. Recent data confirms that there has been little change in this outlook, and as a result, previous forecasts will have to be lowered.

March CPI results highlight a dip in inflation by 0.2%. While factors such as lower fuel prices and weaker cost pressures contributed to this fall in inflation, it is likely that these factors are not entirely responsible. Other contributing factors could be the decreases in the cost of food and clothing, which have pushed down the cost of goods and services. Education, which always climbs in price, experienced marginal increases. Education recorded an annual rise of 3.1%, compared to 6% last year.

Falling prices typically discourage investment and also consumer and business spending, which the RBA is trying to encourage. Therefore, economists are now suggesting that the RBA may be forced to cut rates by at least 25 basis points before the year closes out. Some economists are even suggesting that this next rate cut will be in August, taking the official cash rate to 1.50%.


Housing Market

The housing market is also said to be noticing changes. Growth in rental and new home costs have stagnated. According to data, rents have grown by just 0.1%, and new dwelling prices rose by 0.2%.

RBA governor, Glenn Stevens, is said to be watching the housing market. The implementation of supervisory measures by the Australian Prudential Regulation Authority (APRA) is easing home pricing pressures nationwide. The strengthening of lending standards has also contributed. These changes have reduced potential market risks and abated activity described as eager. Now the housing market could be considered as a much evener playing field.

Glenn Stevens suggests that while property investment in Australia is a desirable form of investment it’s not one that is fail-safe, and it is not a get-rich-quick scheme. While property prices rise, they also fall, and even though some investors have witnessed success, this is not always the case.

A property is an asset, so it should never just be a question of what this asset price is doing when investing, said Mr Stevens. Investors should also be asking if the right dwelling is in the right place, and what leverage this has on capital growth and rent yield.

Mr Stevens also added that APRA’s crackdown had calmed the property market somewhat. He also said that as an economist, he felt that that the current level of supply and demand in the housing market was equalising without there being substantial price drops, which sounds like the market is working well.

Are you seeking to enter the property market? If you said YES, then contact eChoice, we can help you find a cost-effective home loan.

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