Interest Rates to go down!
The next move in interest rates is more likely down than up. I note five things in this respect:
- Housing finance numbers indicate a slowdown;
- Housing growth in all cities other than Melbourne is starting to show "cracks" at the margins with lower cost suburbs presenting falls in values;
- Retail sales look to be sluggish at best and more likely slowing;
- The problems in Europe are flowing over into stock markets and wiping billions off the value of portfolios and hence zapping confidence;
- The Government's "great big new tax" on the resource sector is going to unsettle people and runs the risk of diminishing employment opportunities as the resource sector holds back on new projects until there is clarity.
Growth in the housing market during the last three months has been very high. It is not correct to describe our markets as being in a "boom" phase but certainly the growth for houses in Melbourne for the last three months is approaching that proportion. This rate of growth has only been equaled or greater than this on three other occasions in the last 30 or more years. These periods were late 2007 when we had six months of strong growth, late 2001 where we had a period of three months of exceptional growth and during the Australia wide 'Boom' period of late 1988 when we saw annual growth rate in Melbourne of 31.33%.
The numbers when seen against a back drop of the ABS Housing Finance Numbers do not make immediate sense. The ABS reported: "In trend terms, the total value of dwelling finance commitments excluding alterations and additions decreased 2.2%. Owner occupied housing commitments fell 3.7%, while investment housing commitments increased 1.1%.”
The ABS numbers are supported by the fact that there is also a decreasing sales activity situation. During the six months and on an Australia wide basis, sales activity decreased by more than 3%.
This suggests that the growth numbers might not be all that they seem. The unit market is performing much better than the house market and Melbourne is the only capital city where there are no suburbs with falling house values. The low cost segments of the market other than in Melbourne are falling in value and Brisbane is suffering most across the market.
When the above is considered the ABS numbers do make sense. The unit market is the investor market and these investors will also be people who are likely to own homes in the mid to upper cost areas of the market. They will have seen in recent months and years increasing equity in their properties and an increased capacity to borrow. They will not necessarily be upgrading and this coupled with a general shortage of supply, increased confidence in middle to upper management areas will be creating demand and hence increasing house prices around the mid point of the market.
While the first home buyer market has definitely slowed down, investors are active in the current market. They do not suffer as badly as a consequence of interest rate increases, so when selling, don’t forget to pitch your property at investors as well as owner occupiers.
By John Edwards, CEO of Residex
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June 2010
