RBA – OPTS FOR “ELECTIVE SURGERY” PRIOR TO FEDERAL ELECTION !

RBA – OPTS FOR “ELECTIVE SURGERY” PRIOR TO FEDERAL ELECTION !

Congratulations to the Reserve Bank of Australia (RBA) for its independence with clear policy that no political party is bigger than the economy at large. Politicians then set out (unsuccessfully) and attempted to mask this latest rate increase by the RBA, as necessary, because of Australia’s unprecedented strong economic growth.

It is now acknowledged that certain parts of the economy are growing in the wrong direction – an illness without a cure with symptoms for which there is no treatment. Hardly a surprise after the third quarter consumer price data was released last week – yet neither side of politics can offer a remedy to correct the ‘smoking gun’ of the economy. In quarter three 2007 housing related expenses such as rent accounted for half of the Consumer Price Index (CPI) where it added 0.37ppt to the 0.7 per cent increase in the quarter. You can’t blame the respective governments for the drought which saw food prices escalate – but you can blame them for the rental crisis which they must now address.

In Sydney CBD the rental vacancy factor sits at record lows of 1.5 per cent which simply can’t be sustained by a growing economy. In quarter four 2007 the housing driver will again be higher than quarter three placing more pressure on the CPI as we all know that food costs won’t be in reduction mode. For some considerable time now I have argued that this rental crisis requires governmental intervention because vacancy rates need to fall between 2.5 per cent to 3 per cent if we are to see any equilibrium in the property markets. The current vacancy rate of 1.5 per cent is a disgrace and until this is addressed, we can expect no easing in interest rates.

Immediately after Wednesday’s announcement, rents were again tipped to rise on the back of this interest rate hike. Why? Because you can do anything when vacancy rates sit at just 1.5 per cent and rents are adjusted upwards by up to 10 per cent per annum and climbing higher. The federal government needs to act fast and offer investors a sliding scale for Capital Gains Tax (CGT) where on each annual anniversary of ownership, CGT is reduced, based on the number of years of ownership. As more and more investors enter the rental markets and returns diminish, this would be off-set by ongoing reductions in CGT over longer holding periods. This rental initiative has to come from the federal government given that the current NSW government is a basket case that struggles to manage all or any of its portfolios. The NSW rental crisis lies solely in the hands of the current State Labor government. Previous greedy tax policies fast removed investors from real estate markets. Although Vendor Exit Taxes, Premium Property Taxes and Land Tax threshold tinkering has now ceased, nothing can change how they (individually) delivered markets that were “on the nose” with investors gone, but not forgotten. An embarrassing truth!

This week’s interest rate rise in NSW can be directed wholeheartedly at the state government’s negative economic policies. On top of this, the federal government (when it introduced GST in 2000) has seen taxes increase not decrease.

The 7.30 Report on the ABC – Economist predicts further rate rises. Broadcast 07/11/2007 “For most economists, today’s interest rate rise was a done deal once last week’s inflation numbers came out and Associate Professor Steve Keen from the University of Western Sydney believes the Reserve Bank statement signals there are more rate increases to come.”

Now for Mr Keen’s interesting thoughts on the rental markets which were just a part of the interview.

KERRY O’BRIEN: “So what is the picture now with rental accommodation and what is the likely impact of this next rise?”

STEVE KEEN: “That is almost where you’ve got to say “who’s writing the script here?” Joseph Heller, because at the same time we had what people call the housing boom, if you take a careful look at what actually happened, we didn’t really build all that many houses. Over 90 per cent of the money that was borrowed during the so-called housing boom was used to buy existing properties, less than 10 per cent went to build new accommodation. That’s why when we got to end this so called housing boom and found ourselves with a rental crisis, almost before we could blink. America on the other hand did build large numbers of houses and now have a glut. So we’ve got the ironic situation at having house prices that are too high for people to afford and simultaneously a shortage of rental accommodation for people who can’t afford to buy a house which is driving up rents and to me that’s the real irony of this latest interest rate rise. The Reserve Bank sees increasing interest rates as a way of controlling inflation, but in fact the biggest contributor to inflation in the last set of figures was the increase in rental costs, which was 5.8 per cent over the year, so it’s catch 22. We’re putting up interest rates to control something that’s going to become more expensive.”

These comments are well supported by the graphs – John Howard is yet to produce his housing affordability plan. Kevin Rudd’s plan to restore the great Australian dream by encouraging young people to save for their first home, is a no brainer. It’s almost impossible to save when rents are rocketing upwards!

This week the Planning Institute of Australia produced its report card that shows the performance of each state. Not surprisingly, NSW received a fail mark of D-plus, while everywhere else (except Tasmania) received a pass grade of C. Marks for climate change as well as future transport and infrastructure needs, dragged NSW’s performance down. Hardly a positive spin if NSW is to attract investors (obviously not the case today).

So how did this week’s interest rate increase affect the Mosman market? Mosman this week, posted the two highest sales of the 2007 year – two waterfrontages at $14.700 million and $14.800 million (RWM posted one of these sales). RWM subscriber sales have now climbed to $658,399,000 an Australian real estate record. Cheers ^__^

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