Market comment: Sydney Property Benefits from Budget, Rate Cut
Fri, 18 May 2012, Andrew Croll At its May meeting the Reserve Bank of Australia responded to the slowing economy and reduced its cash rate by fifty basis points or one half of a percent. In at least one key indicator for the property market – auction results, the effects were apparent almost immediately.Sydney auction clearance rates had been lingering around the 50% level for several months. Taken at face value, this wasn’t an indication of anything but a slower market, but analysts had expressed concerns that interest rates were too high and had caused buyers to stay away from recent property auctions.
Since 1 May, the date of the RBA’s cash rate cut, the auction clearance rate has risen. On 5 May it was 61% and then on 12 May the rate was 62%. These are well above the rates for the same time last year.
Are there more rate cuts to come? Financial news source Bloomberg reported that many currency traders expect the next one in June: “Traders are pricing in an 86% chance the RBA will lower the rate to 3.5% next month, swaps data compiled by Bloomberg show, as bets rise that Greece will be forced out of the euro.”
RBA runs out of excuses
In his May statement announcing the rate cut RBA Governor Glenn Stevens as much as admitted the Bank had got its settings wrong: “This decision is based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected, while inflation has moderated” was the way he put it.
The RBA has found it expedient to use relatively high interest rates as a bulwark against inflation, targeting a range between 2% and 3%. In recent times the rate of underlying inflation has held steady at close to 2% and what the Bank calls ‘CPI inflation’ has fallen from about 3.5% to just over 1.5%.
Noting that interest rates for borrowers have remained close to their medium-term averages for some time, and that housing prices have slowed since a year ago, the Bank could no longer point to the property market as a source of inflationary pressures.
Add to this a decelerating Chinese economy, a US economy that’s more stagnant than it is stable, and Europe’s ongoing fiscal train wreck, and there’s little reason for the RBA to do anything but prime the pump a little and see if the Australian economy responds. Early indications are that it will.
Another potential source of stimulation for the industry is the Commonwealth Government which released its latest Budget on 8 May. The Housing Industry Association’s senior economist, Andrew Harvey, expressed his disappointment that it contained nothing to stimulate the residential building industry.
“At a time when new home building is in decline in virtually every state and territory, the budget has failed to deliver any new measure to reinvigorate the home building sector, despite the sector’s health being absolutely crucial to a healthy domestic economy,” he said.
Negative gearing unaffected
Even if the Federal Budget may not seem to have carried any news to affect the property market one way or another, two key elements of Treasurer Wayne Swan’s fiscal preparations for next year’s election will become important drivers of the real estate industry in coming months.
The first element is the government’s decision to leave negative gearing alone. There were some pre-Budget fears that the Gillard government might try to remove this tax-effective means of investment as a way to scrape in some extra funds but not this time around, as it turned out.
The second element is the government’s perplexing attack on the superannuation plans of thousands of older Australians by cutting the amount that can be salary-sacrificed into super funds from $50,000 to just $25,000, for the next two years at least. Just as the ‘Baby Boomers’ are working their last few years to stash away as much as they can and stay off the pension, the government has made it harder by $25K next year.
Nicole Pedersen-Mckinnon wrote in the Sydney Morning Herald: “One of the cuts was a two-year delay in the plan to let people 50 and over with less than $500,000 in super keep paying in up to $50,000 a year - halving almost overnight their allowable contributions.”
She continued: “All fiftysomethings will need to review what they pay in and possibly look at tax-effective alternatives such as negative gearing and insurance bonds.”
It may be that trying to get rid of negative gearing was simply too hard for the Budget planners, and that it was much easier to increase the tax take by removing another avenue of tax minimisation instead.
Whatever the government’s reasoning, the result is that negatively gearing a rental property has suddenly become a much more desirable means of creating wealth for those planning their retirement.
Although it’s doubtful that anyone over 50 years of age would need further proof the government can’t keep its hands off the superannuation cash cow, this Budget certainly qualifies as evidence.
And if those same fiftysomethings want any additional reasons to put their money into property rather than packaged investments like funds they should examine the fate of SMSF investors in the failed investment house Trio Capital.
In the words of a Sydney Morning Herald editorial, “…it has been possible under Australian law for thieves to take over an entire investment house which had been soundly run, with the intention of defrauding its clients.”
Compounding the damage done to hundreds of investors, many of whom lost their life savings when Australia’s corporate watchdogs failed in their duties, was the callous decision by Superannuation Minister Bill Shorten to deny them compensation saying they had been “…swimming outside the flags” when they followed the advice given by their licensed financial advisers to invest in the fund.
Had these victims of fraud placed their savings in investment property instead they’d still have assets to generate income for their retirement. Now they have nothing.
Investment property interest grows
Writing on Domain.com, Chris Tolhurst noted that until recently investors have been relatively quiet.
“Bank deposit rates have been high, which has encouraged many potential buyers to bank their funds rather than invest in bricks and mortar.
“Now that deposit rates are heading south on the back of the RBA's cuts to official interest rates since November, it's going to be a lot more tempting for the cashed-up to invest.”
So perhaps it’s not surprising that a recent survey of more than 1000 homeowners found that one in four is interested in acquiring an investment property. The survey, conducted by Galaxy Research, found that 26% of existing homeowners are looking to buy a second property.
There are of course other reasons for being optimistic about Sydney property. Some come from the Australian Bureau of Statistics whose figures show that the unemployment rate in NSW was just 4.9% in April, making this the second-best performing state despite missing out on the much-discussed mining boom. Retail sales in March were also up 1.2% according to the ABS.
Is there more good news about interest rates on the horizon? Residex CEO John Edwards, who had predicted the RBA’s May cut, praised the outcome the next day saying that the interest rate reduction would provide a much-needed boost in consumer confidence.
“Without some form of stimulus, we would have been likely to continue seeing housing values decrease across much of Australia.”
He then added: “Depending on the content of the upcoming Federal Budget and its assessed impact, a further 25 basis point adjustment could come in June”.
Two weeks later he wasn’t betting on an early date for the next rate reduction: “The noise in terms of economic indicators currently being presented suggests things are improving and any further rate cuts are now a little further off.” Time will tell.
Australia’s Treasury Secretary, Martin Parkinson, told a Sydney audience on 15 May that the government still had room to move on interest rates: “To the extent there is weakness across the economy, monetary policy is well-placed to respond, unlike in many other advanced economies,” he said.
Because of growing concerns about the economic meltdown in Europe, the Australian share market continues to plunge to new lows for 2012. The housing industry can now look forward to at least one more interest rate reductions of at least 25 basis points, quite possibly in June, with another reduction likely to follow.
Although the RBA may hold off until the year end economic data has been produced and analysed, Australia’s investors have every reason to seek security in bricks and mortar while interest rates are low and property prices are stable.
Sources:
‘Demand may rise on heels of rate drop’, Chris Tolhurst, Domain.com, 12 May 2012
‘Rates, jobs, house prices all point to revival’, Dr Andrew Wilson, Sydney Morning Herald, 12 May 2012
Statement by Glenn Stevens, Governor: Monetary Policy Decision, Reserve Bank of Australia Media Release, 1 May 2012
‘Federal budget 2012 a lost opportunity to reinvigorate home building sector: HIA’, Jonathan Chancellor, Property Observer.com, 8 May 2012
‘Conditions right for investing’, Sophie Elsworth, News Limited newspapers, 30 April 2012
‘Shock super slug to us all’, Nicole Pedersen-Mckinnon, SMH Money, 13 May 2012
‘RBA well placed to cut rates more: Parkinson,’ Bloomberg in SMH Business, 15 May 2012
Residex Market Wrap – April 2012, John Edwards, 15 May 2012
‘Trio's shadow over super system,’ Sydney Morning Herald, Opinion, 18 May 2012