Finance Market Update – 31 January 20
In this fortnights update we look at the residential property markets clearance rates and price increases and talk about how more rate cuts might add fuel to the fire.
Since the end of last year, we have seen clear signs of a busy property market and no signs of it slowing down.
The usual facts and figures are painting this picture. Higher (than average for holiday time) clearance rates, record-breaking auction results and increase in sales prices.
There is more interest in buying property now than over the past year.
Core Logic reported that the last quarter of last year the combined capital city clearance rate was 70.3% which is drastically up from the 43.6% experienced in the same end of year season in 2018.
This momentum has carried into the new year.
Core Logic also reported that in the first three weeks of 2020 prices in Sydney on average increase by 0.7%.
If we extrapolated that result out over 12 months it would be around an 8% total price growth.
That is just shy the ~10% price decrease we saw during the “downturn” last year and we could very well see that total loss evaporated.
Well, the rebound won’t be consistent everywhere, but on average, prices are picking up.
The strong rebound is being driven by low interest rates, ability for people to borrow more and pent up demand.
Of those three factors low interest rates are worth talking about a little more because they are about to get lower.
Decreased interest (rate)
In the RBA’s first meeting of the new year and new decade, will they cut the cash rate?
My call is that no they won’t.
Let’s talk about why.
Firstly, they can sit on their hands for now.
The RBA has a bit of breathing space thanks to recently released inflation and employment data from the Australian Bureau of Statistics. Two critical pieces of info it uses to assess the monetary decisions.
They don’t need to make a call right now because there is no specific reason for them too, so why would they.
Secondly, they haven’t seen big enough results from the last cuts.
The effects of the previous two cuts has not materially shown up in consumer confidence or household spending.
Consumers are going for property, but retail is really struggling. More retailers like Jeans West will continue to collapse because of a lack of consumer spending (in their shops). And household spending hasn’t got a boost.
Thirdly, they have limited ammo left.
Treasurer J-Fry has quite bluntly said the RBA needs to do all it can to get employment up because the federal government will not be splashing out (more) cash in fiscal spending to boost the numbers.
So, the RBA is cornered with nowhere to go but down, but they can only go down once or twice more before cuts are truly ineffective, which means they will pick the timing very carefully.
If we had to guess, we would say April and July for a cut each.
In an update from last October we called a 0.25% cash rate and are sticking with this view.
We also predict that would result in mortgage rates of 2.69% which will be very interesting to see, particularly as we know low rates get more people borrowing, which in turn heats the property market.
Low interest rates have a direct impact on property market activity and prices.
As rates get lower property prices will edge higher.