Our October market report was distributed last week in advance of the RBA announcement. Unfortunately in it, we picked that interest rates would rise on Tuesday, this is where we are in the cycle - interest rates ticking up! Like all cycles, they will also tick down over time. Why is this unfortunate - because I imagine this is what you want to hear.
Our assessment of interest rates rising was loosely based on technicals and majoratively influenced by fundamentals, the RBA's decisions are thought to be based solely on what they see through the rear vision mirror but this is simply not the case. Interest rates can only change once a month and just because adjusted CPI was 2.8% for the year and 0.7% for September (it was 0.6% for August) as far as the RBA were concerned it is at the high end of the target range and on a monthly basis - ticking up on the run into the Christmas period. We think the RBA in part, are concerned about the economies capacity and expected wages growth in 2011,. The RBA saw savings increase for the last quarter, they have seen a restraint in house price growth - and would like to keep it that way for the moment. Now if they get it wrong, we don't go to hell in a hand basket, rates can come down just as quickly as they go up and they don't have to come down in the same increments they went up (usually 25bps). The RBA have proven a willingness to relax rates quickly if required, consumer sentiment responds very quickly to what it perceives as the right message, rates going down would be such a message. For some reason, most people think that because rates are going up they are going to stay up, this is just not true. Most people seem to take a ten year (or longer) view on an interest decision - they go up and down they are not forever, people also confuse interest rate and property cycles with the bourse - neither of the former move up and down with the same volatility as the latter. What people are better to do - in our opinion, is form a view as to whether they see opportunity for them, does your cash flow permit a hold, even with a further full 1% interest increase - with a certain amount of comfort (does it fit your appetite for risk)? What savings can you make on your purchase today due to higher rates as opposed to paying a premium in a lower rate environment with more competition? If you are an investor, how do the yields compare - although capital growth may be constrained today; what does a 5-7 year investment horizon look like (bearing in mind affordability is seeing people rent for longer or delay the upgrade, adding to rental supply compression), does the tax offset work for you? Have you bought the asset well, to manage the down side risk? have you considered a fixed/variable loan, to deliver you more interest rate smoothing (interestingly though, over a 5 year time frame, if you were 100% variable, your cost of funds would have been cheaper than had you fixed)?
We think the rate rise presents good opportunities for astute buyers (some will say "you always say its a good time to buy" - and it is always a good time to buy; it just depends on the strategy employed at the stage of the cycle we are in at the time - property and interest rates; and knowing how to capitalise on these opportunities while managing downside risk). Its not about what the RBA do - we have no control over that and conjecture adds no value at all in our view; its how we respond as opposed to react. The following ABS data is interesting, on the one hand it suggests the persistence of the problem (supply) but looked at another way, it provides opportunities - certainly in the near term (rising rates), beyond that - who knows!
The ABS this week released building approval numbers for September 2010. On a seasonally adjusted basis, total dwelling approvals fell by -6.6% for the month, annually total approvals are down by -11.6% and this week’s interest rate hike will likely further dampen building approval numbers in the coming months. Private sector dwelling approvals have fared quite poorly also. Private sector house approvals are down by -2.3% for the month and are -14.1% lower over the year. Private sector unit approvals had been quite buoyant over recent months however, they recorded a sharp decline of -15.7% during September and are down by -0.6% for the year. In summary, under supply persisted - this contributes to rising rents as would be buyers stay put; it constipates the supply chain (people don't move up the chain, its as much a top down issue as a bottom up one) and in many instances vendors need to adjust their expectations downwards. This pressure usually puts upward pressure on prices as demand exceeds supply. At the moment however, as demand has retreated due to rising interest rates, price is coming down, lack of competition has and is eroding the premiums that vendors have been getting. Buyers can therefore expect discounts and the purchase price savings also translate into savings on stamp duty.
Unit yields in certain areas of the prime market are 5.2% + and house yields (terraces, semi's, freestanding homes) are circa 4%. In a normal market, house yields are between 2-3%...
Check out our latest market report Rose & Jones October Market Report
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