Rate Cut – Stimulates Housing and Sounds a Caution on Fundamentals

The recent Reserve Bank decision to lower the cash rate by .25 percentage points to a record low of 2.75 per cent is a positive sign for property investors. This is a history making decision, not since 1960 have we seen rates this low.

RBA governor Glenn Stevens explained the decision in part saying that a further decline in the cash rate was deemed to be necessary to “encourage sustainable growth in the economy”.

Mr Stevens said the Australian economy is likely to pick up speed next year, as financial conditions continue to support growth, borrowing costs remain low and funding conditions continue to improve.

A fall in retail sales and job advertisements, subdued inflation well within the RBA’s target zone are all good reasons for another cut,” Real Estate Institute of Australia president Peter Bushby said in a statement.

Less jobs and sales also sound a caution for real estate investors.

A steady rise in clearance rates this weekend shows the news appears to be encouraging buyers and their advocates, particularly first home buyers, who are competing to take advantage of the $7000 bonus plus 40% stamp duty discount, prior to the 30th June 2013 with property investors competing for prime rental property in some inner city centres in danger of being pushed sideways as a combination of low stock levels and the young buyers use their inflated leverage in competitive bidding.

If you are considering whether the time is right to step into the property market, it’s important to keep a steady head and adhere to structured investment principles. Not all property markets and cycles are alike. Mid and short term property investors should seek experienced advice before making a residential or commercial property investment decision in any market.

The increasing numbers of SMSF investors, encouraged by their advocates such as financial planners and accountants to settle investments before the same date, is also stimulating competition.

Aggressive action by banks such as the ANZ reducing their interest rates below the reserve benchmark is also playing its part in stimulating housing clearance rates as it makes it easier for people to obtain funds.

“I would not necessarily describe this as a ‘perfect storm’”, says Jock Bing of Portfolio Management, a long time property investment specialist: “ but certainly conditions needs careful consideration and a hard look at the fundamentals.” “ The best way I know how to do this, is to measure the property’s performance against rents in the area, and this means looking at these figures not just for today, but for the short and medium term.

In this regard there is a shortage of accommodation in Brisbane and Sydney. The tightening yields in Sydney are reflecting the deficiency of rental accommodation not being addressed. Melbourne on the other hand is showing a rough parity between supply and demand for accommodation.

Attitudes also play a part – rental demand in both Sydney and Brisbane are much greater – people seem more comfortable with renting in these cities says Bing, in Melbourne rental tends to be a shorter-term option for many young people.

There’s a view in portions of the market that off the plan investment properties will provide opportunities for the great demand for SMSF property needs. This implies a danger of inflating prices in off the plan units and includes the questionable capacity of whether these units will be able to service the debts even with interest rates at these low levels.

Rental producing property investment has the capacity to provide higher returns in a low interest environment, but never has it been more important to do your sums.

“At a some point international investors will pull their money back. Judging this and at what level it triggers a flight of cash out of the country and away from property investment is the question.”

Solid income producing property is vital for short and medium term portfolios and a conservative approach on returns is the key, certainly the value of existing property is underpinned by the fact that this accommodation cannot be replaced at current prices with the steady rise of building costs.