Sunday, November 6, 2011

Interest rate cuts = buying opportunity for property?

So the RBA cut the cash rate last week by .25%, bringing the rate down to 4.5%, with most of the banks following suit with their mortgage rates. As pointed out by DFM on MacroBusiness, this looks to be only the start of a rate cut cycle:
The RBA today signaled the start of an easing cycle, not simply a one off move in the cash rate.  The rhetoric that they used was heavily slanted toward the risks associated with the current economic outlook with only a passing glance at the once dominant mining engine. Equally, as you can see in the Wordle pictogram of the statement that inflation is the key theme and trigger, its emphasis illustrating previous importance and its subsidence allowing the concerns for the future to predominate. Read the rest at MacroBusiness
Let's take a look at past instances where RBA has started a rate cutting cycle:

Jan 1990 to July 1993, rate dropped from 17.5% to 4.75% over 15 cuts
July 1997 to Dec 1998, rate dropped from 7% to 4.75% over 6 cuts
Feb 2001 to Dec 2001, rate dropped from 5.75% to 4.25% over 6 cuts
Sept 2008 to April 2009, rates dropped from 7% to 3% over 6 cuts 

There have been no other rate cuts outside of these cycles and in each cycle we have seen at least 6 cuts (h/t DoS), so assuming a similar pattern continues we are probably once again going to be staring down the barrel of a cash rate of 3.25% (or possibly lower) in the near future (assuming we see no larger than a .25% cut on any of the 5 that could come). I could see such a rate cut cycle playing out over the next 12-24 months as debt burdens continue to plague the western world which will slow global economic growth.

Of course there are events which could either speed up or reverse this interest rate cycle. For example as DFM pointed out in his article, if Europe were to implode it could quicken any rate cuts as the RBA tries to lessen the blow of such a credit event on our economy. In my opinion it would take something fairly significant to reverse the rate cut cycle, perhaps a return to heavy quantitative easing by the US as well as the European situation stabilising. Such an outcome could see inflation pick up again and force the hand of the RBA should it get too far out of control.

Based on the information we have at the moment and events already transpired I am personally expecting further rate cuts (although as above my mind could be changed if we were to see a return of QE), so then what next for house prices?

Some have pointed out that even falling interest rates or ZIRP have not been enough to avoid a house price crash in other markets, such as the US, UK, Ireland, Spain and elsewhere.

While falling interest rates could slow the speed at which house prices fall here, I still think a slow decline is likely over coming years. I think the first cut is likely to have very little effect at all on the market by itself and that prices will continue to fall steadily until we see further action.

In 2008 it took a multiple prong approach by the government and RBA to keep house prices propped up (as I've pointed out before):

- Interest rates were slashed by the RBA
- Foreign buyer (FIRB) laws were relaxed
- Housing stimulus was injected directly and indirectly

And of course as I pointed out in an earlier post, our banks were heavily supported so as to keep them lending:

- Australian banks tapped the US Fed for billions in emergency funding
- Australian banks were extended deposit and wholesale funding guarantees
- Australian banks benefited from increased lending stemming from the FHOB
- Australian banks were supported by the RBA (who bought RMBS)
- Australian banks were protected by ASIC with a ban on short-selling shares

What if we saw not only interest rates being cut, but other policy and stimulus changes?

I don't necessarily think the same tricks are going to work as well a second time around. However I do definitely think that changes of this nature have the potential to slow the bursting of the bubble or even keep it inflated for a little longer. At the end of the day though such changes are only temporary in nature and like QE and the EFSF are only delaying the inevitable!

For any readers of this blog who were readers of GHPC you may (probably not) remember a couple of threads I posted in early 2009 providing opportunities for first home buyers. In each thread I showed that there was the ability for First Home Buyers to purchase a house/unit in select Adelaide suburbs (within 10km of the CBD) for very little more than the cost of renting the same. The calculations included a 5 year fixed rate and inclusive of the FHOG as part of the deposit. I can't recall the % used in the calculations (GHPC is no longer online to check my old posts), however rates as low as 5.79% for 5 years fixed were possible at the bottom of the last rate cycle. If rates get that low again then it may very well be worth looking to see what buying opportunities are out there.

Many seem to see my stance on housing as permanently bearish, but that is certainly not the case. As recently as 2007 I was looking seriously at investment property opportunities (several offers I made were rejected) and as mentioned above I was pointing out SELECT buying opportunities at the bottom of the rate cycle in early 2009. If such a low interest rate environment came around again then it would be prudent for buyers to be keeping an eye on the market and scouring for opportunities.

For a buyer who is planning to live in the property long term, the capital appreciation (or depreciation) rate is likely of less concern to a buyer who wants capital growth ASAP so they can flip the property or leverage further using an increase in equity. So an opportunity to lock in long term fixed rates at the bottom (or close to) of a rate cycle should not be overlooked by owner occupied property buyers. 5 year fixed rates are currently around the 7% mark (and have recently been higher), a 5 year fixed rate at 6% would offer a reduction of around 15% on the cost of interest over that period or a $3000 per annum saving on a $300k mortgage.

My biggest gripe with housing is it's exorbitant cost over the price of renting and falling interest rates have the potential to change these figures dramatically (such as those I looked at in this rent vs buy comparison 12 months ago, Link).

Ultimately each persons situation differs and when it comes to buying a owner occupied property there is more to consider than just the financial aspect. What price do you put on the locational security of your family? On your ability to modify your home significantly to make it more comfortable?

If prices did continue to fall after the occupied investor has purchased the biggest risk is a forced sale from unforeseen circumstances, so ensure that when purchasing you have taken all necessary precautions that are suitable for your situation (this is not advice, simply some options to consider), such as income protection, fixed interest rates, mortgage protection insurance, keep a savings buffer and pay a larger deposit when purchasing initially to keep your LVR low.

Both renting and buying each have their own advantages to consider and the financial advantage that renting currently has could soon be further reduced... keep your options open and your thinking balanced.

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  1. Rather than belatedly stealing from my thread, you could come and join the discussion.

  2. Strindberg. I didn't see your post on APF before writing this article. The h/t went to the 'Dad of Sam' comment on the MacroBusiness article (see comments section from link in article) because that's where I saw the reference and then looked up the data myself.

    For the record I will not be allowing further address links to the APF forums anywhere else but in comments on this page:

    I will allow your post above to remain as the one exception.

  3. BB, I suspect that houses are places to live in not investment strategies. If we were to turn around negative gearing and change our population growth then the music may well stop and the investor may be left without a chair at the buyers tables

  4. obakesan, fair point. Our population growth is already slowing from the peak seen a couple of years ago and personally I don't believe negative gearing needs to be removed for investors to take a hit in falling prices or low capital growth.

    The post was not from an investment angle, it was from a financial angle.

    All buyers (including those buying to occupy themselves) must take into consideration the financial cost of ownership. It is not necessarily an investment decision just because the it has a financial angle.

    If a family decided to rent instead of buy so their children could go to private school or so they can enjoy more family time be working less, that's not an investment decision... falling interest rates mean that the family may be able to buy for a lower cost and perhaps still enjoy some of those extra benefits.

    Hope that helps clarify the context of my post a little more?

  5. obakesan, NG can't be abolished or whe get what happened in the 80s - a glut of houses on the market from investors looking to liquidate and a slip in prices.

    but that's not the worst of it. as private rentals dry up, the govt will have to step in a purchase, manage and maintain social housing.

    i'd rather subsidise private rentals than lose more hospital beds and police, personally.

    BB - i think your post is close to the money. We all know how the sheeple think - they wont flock to housing any more or any less than before until sentiment changes. However, it gives self-interest groups like REI and HIA ammunition to talk up the market, creating another move into property.

    certainly an interesting time. I don't think any "rush" into property can be sustained, but I also don't think we're in for a price landslide.

  6. Hi Guys

    uncertain if you would find it interesting but there is a good post on negative gearing on The Unconventional Economists blog (resisting posting a link due to previous comments about another link) Google "the unconventional economist negative gearing myths exposed"

  7. we're also talking about a very narrow field of investment - NG here or there won't affect the overall economy that much, i guess. i mean, the figures for those that have an investment property are some pitiful percentage of total housing stock, so i doubt that the removal or NG and the subsequent asset liquidation (privately or by banks as servicebaility requirements change) would even affect the market to any great degree.

  8. BB, you say..... "For the record I will not be allowing further address links to the APF forums anywhere else but in comments on this page:"

    But didn't you close comments on that page too, after people started questioning your motives?

    You started a big pointless troll article about APF without any evidence, you support the well known troll and "bannee" from multiple forums "pauk" as he sets up a rival forum to APF and spins dozens of lies about APF, and then you close your comments so nobody can call you on it.

    You do realise Pauk is banned from Somersoft and Credit Crunch as well as APF don't you. Why? Because he is a troll. His new site proves that.

    You've been sucked in by a serial troll BB.

    I know you probably won't let this comment display either, but ... meh.

  9. @Anonymous, your post went to the spam bin, so I have restored it.

    Comments were closed after an argument between Pauk and an anonymous commenter started going around in circles. I have since removed these comments from both posters.

    There is plenty of evidence of deceitful practices by APF (such as the landing pages for other websites).

    The section on Pauk was only a paragraph of the content.

    I have been impersonated online for far longer than Pauk's falling out with APF e.g. refer my post in June, which as I understand it was before Pauk got banned.

    If you really think there is something worth saying about the post that wasn't already said by Stringberg then feel free to email through your grievances and I will consider adding a feedback section to the page with your appropriately worded response. Otherwise feel free to discuss it on the troll forum where I see that someone has setup a thread in the lounge.

    Further comments on the topic may be removed. I posted the page about APF not as a discussion point, but as a warning. I am moving on and the page will remain there as an FYI to anyone who stumbles across it.

    Thanks, BB.

  10. Just in addition, you suggest that Pauk is a troll because he is banned from a couple of sites. Well APF is banned from being linked on Somersoft as well, it's also banned from putting links into Bubblepedia and now it's banned from putting further links on my blog so be definition the site must be a troll as well right?? Rhetorical. ;)

  11. is not a place to
    express your own views. You are banned...

    So much for free friendly speech there.

    Love BULLIONBARRON though.