RBA leaves interest rates on hold

With the Reserve Bank leaving the official cash rate on hold today, it has many property owners wondering whether now is really the bottom of the cycle and how they should make the most of it.

The lower interest rates has seen news come out of Perth of tenants breaking their leases to get into the buying market, causing landlords to react by lowering their rents.

However, in other states and territories this isn’t quite the same story and there are opportunities to take a closer look at how to time decisions correctly.

“Perth is the only market where first-home buyers are back to where they historically have been,” said BIS Shrapnel’s Angie Zigomanis.

“Activity in New South Wales and Queensland [from first-time buyers] is so low because of the changes to government initiatives that sucked the demand forward,” said Zigomanis.

This leaves investors in other states able to focus on maximising their investments during this lower interest rate period

When looking towards fixing your loan, however, there may yet be some time to go before it sits at the top of your to-do list.

Zigomanis predicts that there’s the potential for perhaps just one more cut this year.

“But they’ll probably stay stable for all of 2014 and start rising from 2015. The RBA will want to see an upturn in the economy first. Their real concern is that they’d like to see an upturn in construction that it is sustainable,” he said.

“Wait a little longer to fix.”

SQM Research’s Louis Christopher agreed that the end of the rate cutting cycle is getting closer and that investors need to start being diligent about looking out for when increases are likely.

“The first thing we’ll see before an increase will be the banks lifting their four, three and two year fixed rates move to being at a premium to current variable rate, whereas currently they’re on par or at a discount to them.

“When that will happen I’m not sure, but it will happen when the market starts to tip more confidence in the economy, business and consumer,” Christopher said.

However, there’s one unknown factor for investors looking to pick when the next increases may occur.

“Will the RBA need to respond to rapidly rising house prices? It has been a good run so far for existing property investors and owner occupiers and we think the market recovery will continue into 2014,” he said.

In fact, currently the biggest indicator for investors will be the percentage rise by which the property market recovers.

In an address to the Anika Foundation at the end of July, RBA governor, Glenn Stevens said that the outlook for income but also the expectations for asset values, in particular whether housing prices are overvalued, will heavily affect the overall decisions made by the RBA.

“Those who think they are will be drawn to the conclusion that a number of additional years of flat or declining real per capita asset values lie ahead, for non-financial assets at least; those who are not so worried about housing prices may expect that stronger growth, in real per capita terms, might occur,” Stevens said.

“Either way, however, it would seem unlikely that we could bank on a resumption of sustained growth in assets, in real per person terms, of 7% per year over the next few years. It follows that the saving rate is unlikely, any time soon, to decline back to where it was in 2005.”

With this in mind, investors need to be watching the growth figures carefully to predict when the rate cycle might start heading upwards.

“It’s a difficult one to know whether they should fix at all. Timing of these things is very difficult to do. It takes constant research and what your own personal financial situations require,” Christopher said.

“It’s very individual but in our opinion we do believe we are getting very close now to the end of the interest rate cutting cycle. I think when there is more confidence, and it may well come soon after the election, it will be difficult for the RBA to justify the rate setting when house prices are rising beyond 7%.”

Jennifer Duke

Jennifer Duke

Jennifer Duke was a property writer at Property Observer

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