Sydney Harbour Aerial View – Open Source Lower interest rates, a reduced ability to stash money into superannuation funds, and a sharemarket in the doldrums. Property is now the best investment.
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.
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.
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.
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. 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.
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 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.”
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.
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.”
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 reduction 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.