This Tuesday we have our first Reserve Bank of Australia meeting for 2012, where it would come as no great surprise if the bank leaves the cash rate at 4.25%. The RBA is well aware that Australian banks’ funding is under great pressure as a result of the global financial crisis to the extent that our banks have already forewarned that if the cash rate is reduced it is highly unlikely they will pass on such cuts. I agree with former RBA board member Warwick McKibbin that the bank should wait until the European debt crisis is sorted out – “it’s better you have your weapon loaded so when the crisis comes, you can hit it with full force.”
So how low will the RBA cash rate go in 2012? I am tipping three rate reductions, reducing the cash rate site to 3.25% by the year’s end. On April 9, 2009 the RBA dropped the cash rate to 3%, so I can’t see it dropping below that. We need to remember that in Australia approximately one-third of households rent, the other third own with a mortgage and the final third own without a mortgage.
Australia is most fortunate that our banks are among the top performing in the world – as too our property markets. Three years ago the American property market was so weak the US Federal Reserve cut the official interest rate to zero. This week it announced that it plans to keep interest rates at near zero until the end of 2014. A cash rate that hovers around zero means exactly that – nothing really happens to the extent that the economy is fundamentally broken with no signs of recovery in the short term. If this were to happen in Australia the economic consequences would indeed be dire and property values would plummet with the unemployment rate skyrocketing.
In Australia the property data aggregators (Australia Bureau of Statistics, Residex, Australian Property Monitors and RP Data-Rismark) all offer conflicting market positions that confuse the markets – then throw in Demographia International to complete our “dog’s breakfast”.
I use a much more simple application. My demographic market is Mosman, which has approximately 4,900 houses. I go to Domain and untick surrounding suburbs and then tick houses, where I see that 102 houses are currently on the market, which is approximately 2% – in 2011 Mosman never went higher than 3%. If a property market gets above 10% you then have serious problems and prices will suffer significant collapses.
Another point that needs to be raised is the Chinese factor, which was highlighted in a recent article that appeared in Property Observer – “Harry Triguboff says Chinese buyers back in Sydney market in January: Gottliebsen”. An article appeared in the China Daily last week “Real estate down under proving to be very attractive”: “Chinese investors are showing an increasing high level of interest in the Australian property market. Chinese developers were responsible for 9% of the 30% share foreign developers took in the Australian apartment market last year.”
“In a review by real estate company CBRE for the fourth quarter, more than 1,200 apartments were either planned, being marketed or were under construction by Chinese companies in Australia. The Chinese mainland was only led by Singapore (37%), Hong Kong (20%) and Malaysia (12%).”
“The biggest markets sit along the east coast in Australia’s two largest cities: Melbourne and Sydney. About 80% of the total number of apartments proposed or under construction by foreign developers was located in these two cities.”
So after four years of financial turmoil Australia does have something to smile about although 2012 will be a tough year. Money will be tight, but that is not a bad thing either given it allows property niche markets to consolidate.
Australia is building momentum, which can’t be said for the northern hemisphere markets.
(article from propertyobserver.com.au)