Interest Rate Poker – RBA to Deal an Interesting Hand!

Interest Rate Poker – RBA to Deal an Interesting Hand!

What we have observed in recent times is that the Reserve Bank of Australia (RBA) does not hold all the aces and therefore, it is highly unlikely that banks will pass on the full amount of next month’s rate cut. Since last August the RBA has moved the cash rate up one per cent. The banks added an additional 0.55 per cent given that the cost of funds to banks was actually much higher than the RBA official cash rate (hence the 0.55 per cent market fine). The fall in the 90 – day bank bill rate has prompted the RBA to play its hand with a cash rate reduction which we believe will be 25 – basis points and not 50 – basis points. It makes sense for the RBA to see how the banks respond to a 25 basis point reduction whilst keeping a few more cards up its sleeve. What remains to be seen is whether the banks take a short or long term positioning on bank bill rates.

Which brings us to Federal Treasurer Wayne Swan and his assertions that the banks are now putting the economy at risk. Twelve months ago, he was blaming the government of the day for interest rates increases? Wayne Swan said “It’s a very serious issue for households, it’s a very serious issue for business and it’s a very serious issue for our national economy. There is absolutely no excuse for banks not passing an official rate cut from the Reserve Bank in full, should that occur. Absolutely no excuse.”

Thanks Wayne – I believe the major banks are more concerned watching the global credit (which still remains very much up in the clouds) unfold. There again with Petrol Watch, Grocery Watch and Mortgage Watch all failing “Wayne’s World” is overdue for some good news. The irony being that he, like all of us, is paying the price for the global credit crunch which is now reflected in household balance sheets that have taken an absolute battering so far this year.

Housing accounts for approximately 60 per cent of household assets, so a reduction in interest rates will certainly add some much needed starch to our property markets. The Balmoral property market is without doubt, one of the strongest in the world – yet in 2008 just three houses have sold in excess of $6,000,000. On the other hand the Eastern Suburbs markets are consistent with previous year’s results. The Mosman merchant bankers have indeed been restrained in 2008 which makes us very much aware of the difference a banking bonus makes to our market. The “Merchants of Mosman” are restrained and have refrained! Classic symptoms where tight financial conditions combined with reduced household wealth, take a toll.

With the Aussie$ in decline we remain confident that expats will play a strong part as the Mosman$ is very attractive at present. That, combined with a RBA rate reduction next month and more to follow, adds some much needed chilli to the property menu. Sydney clearance rates were up two percent last week to 48 per cent although same time last year they were 69 per cent. Melbourne was 49.3 per cent and 83 per cent same time last year, so Sydney is looking good.

What is not looking good is that the number of new homes under construction is predicted to drop for the fifth consecutive year, and yes this responsibility falls on “Wayne’s World”. Construction of new homes is expected to fall 6 per cent for the financial year to approximately 145,300 down from 154,200 in 2007. The underlying demand for 2008 will be 191,800 homes up from 188,300 in 2007.

Rents will continue to soar where in NSW, the housing stock deficit will blow out to approximately 18,000 homes this financial year. From an inside perspective, the number of investors currently selling is most alarming and as they are not being replaced, available rental properties continue to diminish. Figures released from Australian Property Monitors identify that Sydney rents increased by 15 per cent over the past twelve months.

“Wayne’s World” would be better served by addressing construction declines which resonate across the country. No doubt he blames the banks for that too, where on closer examination he will learn that State and Federal taxes are the reason for five years of decline. Petrol Watch, Grocery Watch, Mortgage Watch and no need for Construction Watch! The Swan Watch obviously has trouble reading the time (s). Cheers ^__^

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