Some insight and a warning from Michael Yardney

Lower interest rates, the 2016 Budget and a Federal Election – what does all that mean for property?  Michael Yardney gives us an insight and a warning as well.
Kevin:  With more and more lower interest rates on the landscape, and of course, the recent budget, what does that mean for property? Michael Yardney from Metropole Property Strategists joins me.
Good morning, Michael.
Michael:  Good morning, Kevin.
Kevin:  Everyone’s talking about this, aren’t they? What’s going to happen with property? What’s your take on it all, Michael?
Michael:  As we know, recently interest rates have been lowered, and the expectation is that they’re going to be lowered once more, so interest rates may drop another quarter of a percent before the end of this year. Yes, everyone is wondering how is that going to affect property. I believe it’s going to put a floor under our slowing housing markets and it definitely will be welcomed by first-home buyers.
But I think the big factor in people’s minds at the moment is lower consumer confidence – some uncertainty about an upcoming election. A lot of people are a bit uncertain about their jobs. Interest rates have been lowered because the economy is not doing well. I think these other factors are going to make people just sit on the sidelines for a little bit, Kevin, and they probably won’t jump into property because of the lower interest rates, at least not just yet.
Kevin:  Michael, you mentioned there about more rate cuts on the horizon. When will that happen, and what impact are they having on the market?
Michael:  Many economists believe that there will be another round of rate cuts but not until after the election, so probably in August or September. The decision of the Reserve Bank really has taken a number of factors into account: the fact that our housing markets have slowed. APRA seems to be working well in that regard so it doesn’t have to worry too much about the housing markets.
It’s really more worried that our economy is slowing but inflation has almost stalled, which really means that our job growth, wages growth, and economic growth aren’t happening, so they’re trying to encourage it by, I guess, dropping rates more for businesses, who are hopefully then going to feel confident and employ people and buy new equipment. It’s working well in that side.
As for homebuyers, it’s going to allow people to pay off their mortgages a little bit quicker. I don’t think people in these more uncertain times are going to rush off and upgrade their homes or buy bigger houses; what they’re probably going to do is take advantage of the lower rates and get those financial buffers in place.
Kevin:  We are actually seeing the banks, too, passing on this recent decrease, aren’t we?
Michael:  It happened much quicker than in the past and to a greater degree, where most of the banks have passed on the full cut – at present, Kevin. But we know that the banks are being squeezed because of the cost of their funds from overseas. That’s where they get a lot of their money because Australians aren’t putting money into their deposits anymore. That’s how, in the old days, you used to have a savings book and that’s where banks got their money. Now they get a lot of their money overseas, and that’s more expensive.
Also, they’re having to keep more cash on hand because of APRA’s changes, so it’s possible to boost their profits they’re going to do an out-of-cycle rate rise again, like they did last year. That’s definitely on the cards.
Kevin:  What are consumers doing with these decreases in interest rates, Michael? Are they actually paying their loans off faster, or are they taking the decrease?
Michael:  What’s happening is they’re paying their loans off faster, in general. They’re getting rid of credit card debt. Most households are in very good shape, but at the end of last year, due to a couple of stimuli from the government and people feeling more confident, consumers started to spend a little bit more, and we’re seeing that household saving is decreasing a bit.
That’s what the government wants. They want us to be encouraged to spend and they’re encouraging businesses to spend because that’s what makes the dollars go around and our economy go around and pay people’s wages. That’s that interesting mix of not taking on too much debt, not overspending and using your house as an ATM but also spending enough to keep people employed.
Kevin:  Always good talking to you, Michael Yardney from Metropole Property Strategists. Thanks, Michael.
Michael:  My pleasure, Kevin.

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