Category Archives: Real Estate Matters

How to prepare your house for an open inspection

Inspections are like a first date. You only get one chance to make that first impression. Set your property up for inspection success with these simple tips.

 Clean up

Yes, it’s Captain Obvious, but you’d be surprised. Make sure your whole property is neat and tidy when buyers arrive, including the garden and outside areas.

Dust, vacumn, scrub, wash, buff – make all those annoying tasks earn their keep.

Don’t forget to clean inside ovens, cupboards and wardrobes, in case potential buyers indulge a snoop. Remove shoes from the entrance and any hazards people might trip over.

Get the big clean out of the way in advance, then keep your place in good condition while your place is on the market. That way you should only need a refresh to prepare for a new inspection date, rather than a top to bottom makeover.

Clear out the mailbox and get those rubbish bins emptied and, ideally, out of sight (especially if they’re normally one of the first things people will see arriving at your home).

Enlist a professional declutterer if you need a hand – or a friend might even help out. Get a second opinion who can review objectively.

Invite light and air

Air out your home thoroughly before the inspection, so it feels as fresh and clean as possible. If potential buyers feel stuffy they’ll head straight for the door.

If the weather and security permits, crack open a window or two during the inspections themselves, so air keeps flowing through.

Draw back curtains and blinds to bring in as much as light as possible and show off your house from the street.

Help your pets camouflage

One of the most common complaints from potential buyers at open for inspections are those tell tale signs you share your home with someone furry. If they’re not yours, pet smells or stains can actively turn someone off your property.

Deodourise your property to remove the whiff of little creatures and get someone who doesn’t normally live there to confirm you’re clear (you might be used to it and can’t sniff what others can).

Clean traces of hair from floors and furniture, stow feeding bowls and toys.

Remove any litterboxes or droppings from the yard, and give your pets a vacation during inspections.

Personal touches

A personal touch here and here helps your home feel less stagey or artificial, and can spark an emotional connection with a buyer.

One idea is to gather up photos that show off your house (at its best, of course) and put them in an album for people to flick through if they’re curious or inspired. If you don’t have printed photos, you could have an iPad or digital photo frame on rotation.

Fresh flowers are another way to add personality, or a small dish of sweets near the door that people can grab on their way in or out. Remember, it’s not about mints on the pillow, it’s about keeping humanity in the home.

Smell-o-vision
    People fuss over the visual but often forget that it’s a nose can make or break an open inspection.

Remove smells that are unpleasant, like stinky shoes, and watch out for specific food smells that may not agree with everyone.

Counter the ick with inviting smells using flowers, candles, air fresheners or even freshly brewed coffee.

Just take care your smell engineering doesn’t become too sickly or overpowering, and avoid pungent aromas like incense. You want your property to smell like a home, not a perfumery!

A home staging consultant can help with these touches, and can also advise about furniture, artwork and other style elements that can help your place come to life for buyers.

Strike the right temperature

Keep an eye on the weather and heat or cool your home so it’s optimal when would-be buyers walk through.

People shoudn’t raise a sweat or a chill, and you need to demonstrate your property can effortlessly cope with the climate around it. You should be aiming to give them a cool or warm blast, depending on what’s most welcome at that time.

If heating or cooling is malfunctioning and impossible to fix for inspection time, place fans or portable heaters strategically so they don’t get in the way but still do the job.

Safety first

Whether you’re attending the inspection or not, you should take care to remove and protect anything precious or valuable before you open your house up to strangers – just in case one of them is light fingered.

Check with your insurers about your coverage for an open inspection, and if you need to do something extra to stay protected.

You can take items with you if you’re leaving the premises for the inspection, or lock them up in a safe or secure cupboard or drawer. If you don’t have an area you can lock away, hide them in the back of a wardrobe or somewhere out of sight and mind.

Agents usually record the details of people coming through your property, to deter thieves and provide some accountability if anything ends up missing or damaged. However this isn’t a perfect system and shouldn’t be relied upon.

Make sure your property is safe for people to walk through and only let people into your house at the specified inspection times. It’s better to cancel than invite disaster!

Have paperwork ready

Though most buyers don’t get to the negotiating stage during a walk through, it pays to be ready with all the information a visitor might want.

Work with your agent to have any relevant paperwork (renovation history, pest documentation, approvals for further development) in the property ready to be reviewed or go home with serious parties.

The less buyers have to ask, they more at ease they’ll feel in the property and the more time they’ll be able to spend imagining themselves in it.

And just in case someone decides to snap your property up on the spot, you’ve got all you need to proceed with the discussion.

Make yourself scarce


While your house is getting the once over, you should leave potential buyers to wander your halls unencumbered and relaxed.

Coordinate with your agent and be ready to head out for a short time, taking any other family members or inhabitants with you (including the pets). Have a timetable of all planned inspections somewhere central, and a copy to take with you.

Have a bag ready so you can leave quickly (this is also handy for any unplanned inspections). Don’t forget to do a quick pass through on the way out, clearing away any new messes or misplaced objects, like toys.

Source: realestate.com.au

 

10 Reasons the Residential Market will be 5-10% Higher by the end of 2013

 

WORDPRESS SOLD

10 Reasons the Residential Market will be 5-10% Higher by the end of 2013
A word from John McGrath:

1. The Australian share market is recovering quickly & this will generate (& replenish) great wealth for many Australians

2. China is on the surge with an 8% anticipated growth rate this year (and beyond) & we will benefit more than any other country

3. We have record low interest rates with existing & new borrowers reaping the benefits making property more affordable

4. We have a nationwide housing shortage & will for some time, so demand will outstrip supply in an improving sellers market

5. Cash & term deposits are becoming far less attractive & many people will see the time is right to switch from cash into growth assets

6. Rents will continue to climb in the face of the housing shortage providing investors increasing yields over the next few years

7. Self-managed super funds (SMSF) investing directly in residential property is the biggest change I’ve seen in the last 12 months

8. Luxury homes are back by 20%-40% in value & will provide great buying for the recovering professional market buyers (read Palm Beach weekenders are about to become mega popular again!)

9. Most experts are tipping a landslide change in Federal Government which will give great confidence to the business community

10. As all the above happens in our connected community we’ll see a surge of confidence & FOMO which will stimulate continued investment over the next 3-5 year cycle.”

Cairns is continuing on a recovery track as business and economic activity continue to build, the progress to date has been significant and more good news about new projects starting up creating long term jobs.

Baby Boomers – how are you going to retire?

KEY

APRA revealed that the Australian superannuation industry lost $18.5 billion of their clients’ money in the last financial year.

O.K., I accept that last year was a tough year for all types of investments, so let’s be fair and look at the returns over the longer term…

They’re not much better.

Apparently the average rate of return from the superannuation industry over the last 15 years  (between 1997 and June 2012) was 4.9% a year, and this came with a volatility of 8.4%.

Not a very good return considering that for most of that time you could have invested in Government bonds with minimum risk and received a divided of over 5% and the average return from the All Ordinaries accumulation index for the past 15 years has been 7.03% per annum.

Reality Check

A Rabobank poll showed that Baby Boomers are retiring, on average, on about $200,000.

While most folks don’t know how much they need in retirement, it’s generally accepted by the financial planning world that you need around $1 million in retirement to live comfortably.

By the way…I think you need much, much more!

The way planners see it is that, assuming you live in retirement for 15 years with no extra income, a million dollars would give you an annual income of around $65,000.

So you can see retiring on $200,000 simply won’t cut it.

Little wonder that more and more Baby Boomers are looking at taking control of their financial future and setting up Self Managed Super Funds (SMSF.)

What’s are our options?

If these facts teach us anything, it is that it’s up to each of us to become financially fluent and take charge of our future.

More Baby Boomers are setting up their own Self Managed Super Funds and taking their destiny in their hands. Many are investing in shares, but more and more are investing in property. As a matter of fact I have a mixture of both in my super fund.

But my personal preference is for property investment, largely due to the fact that residential real estate has proven itself to be less volatile than shares or managed funds.

Combining the security of bricks and mortar with the tax office changing superannuation regulations back in 2007 so that people can borrow within their own SMSF’s, it is not surprisingly that real estate is becoming an increasingly popular super fund cash cow.

Fact is more and more Australians are recognizing the benefits of property as a strong, stable asset base for their super funds, given its ability to generate excellent returns and capital gains over the long term.

Now, not only can you borrow up to 70 per cent (and under certain circumstances even up to 80%) of a property’s value to invest within your SMSF, you can also seek extra funds to make improvements on the residential properties in your SMSF (with some conditions of course and with special emphasis on repair and maintenance versus improvements).

So what are the main advantages and disadvantages of taking this tact when it comes to building your own retirement nest egg?

The good

  • Control – you have complete control over your SMSF rather than entrusting your future financial wellbeing to a complete stranger, who will take your hard earned cash and invest it in shares and managed funds that may or may not perform.
  • Tax savings – If you buy and hold the property within your fund until you retire and your super goes into the pension phase, you will be exempt from paying either capital gains tax if you sell the investment, or income tax on any rental income should you decide to hang onto it. Before you retire, any capital gains or rental income generated by your SMSF are taxed at a rate of 15 per cent, or 10 per cent CGT is applicable if you hold onto the property for over a year.
  • You could have a diversified investment portfolio that is not reliant on just one investment vehicle, meaning you will have better financial security for your future.

The bad

  • The cost! There can be a significant cost in initially setting up your super fund and the annual compliance costs could be up to a few thousand dollars. But don’t forget the management fees you’re saving by not leaving your money with a fund manager.
  • Higher borrowing costs: currently there are slightly higher fees involved in borrowing to buy property through your SMSF.
  • The confusion: There’s no denying that managing your own super fund can be a minefield of complicated rules and regulations. Get something wrong and you could end up paying hefty penalties. Of course, you can always pay a professional to manage it on your behalf and this is something I would advise anyone with a SMSF to do – whether they’re buying real estate or not!
  • The money: You generally need a bigger deposit to buy a property in your super fund than you need to buy one in your personal name. How much you need depends on the amount of your super contributions. This is not a strategy for someone with a small amount of cash in their super.

Be careful

Of course before you go down the route of setting up your own SMSF, it is critical to seek independent advice from a properly qualified financial planner and to ensure you set up things correctly so you don’t fall foul of the tax man.

With 5.3 million Baby Boomers moving transitioning into retirement over the next fifteen years or so, I see properties bought in a SMSF as a major driver of property values over the next decade.

Source: Michael Yardney. propertyupdate.com.au

If you own or are thinking of buying an investment property

HOUSE

The Australian Tax Office is running FREE Tax Webinars explaining:

Tax issues when buying and owning a rental property

  • what you can claim as a tax deduction
  • how to claim tax deductions.

Tax issues when selling a rental property

  • what you can claim as a tax deduction
  • how to claim tax deductions.

http://www.ato.gov.au/content/00154616.htm

5 New Year resolutions for buyers

 Is 2013 your year for property? Are you getting serious about entering the market? Whether it’s your first time around the block, or a second lap, you’ll want to stick to these resolutions.

 Get your financial house in order

Too many of us have over committed ourselves in recent years, letting dreams get dangerously out of touch with realities.

If you want to buy a property in 2013, make sure you’re ready financially, and you have a rational plan that doesn’t over extend your capacity. It’s no use living in a palace and scrounging to eat!

Pay down bad debt (credit cards and other high interest loans); get a hold of your credit history and assess it; draw up a budget and stick to it; identify where you can be saving even more for a deposit.

Make sure you have a solid savings plan, and enough saved for a back up plan if things go wrong. Check your insurance status. If something happened to you, could you still afford the mortgage repayments you’re looking to take on?

Get financial advice from a professional and understand exactly how much money you can borrow and repay comfortably before you start falling in love with properties. Remember that prices are often indicative and the market is competitive. Don’t set yourself up for disappointment by giving yourself no room to move when you’ve found the perfect property.

Fiscal irresponsibility isn’t just bad for you, it’s bad for the market overall, so make sure you’re in control of your money and it’s not in control of you. Peace of mind is priceless.

Get to know the neighbourhood

Resolve to learn about the place you’re thinking of moving. Don’t just look it up on Wikipedia, really get to know it.

Use Suburb Profiles to get a sense of the property market in that area. Look at median prices, demand and supply ratios, demographics, how long properties are on the market, and other useful data.

Research local publications, bloggers and other voices that give you an understanding of the area.

Go beyond the facts and sample the experience of being there. Take a trip and mix with the locals (not the tourists). See what they get up to, and chat to them about the best places to eat, drink, shop, work, play, learn and relax.

Field work isn’t so you can feel warm and fuzzy about potential neighbours (though you might). Sometimes you can only see a suburb’s best and worst aspects in person. What looks good on paper might reveal itself differently when you’re seeing it with your own eyes, so get the full picture before investing in that location’s future.

Shop around

We look for reviews, ask questions and compare notes on almost everything we buy, especially if it’s expensive. Yet we still usually sink more time into comparing the best deal on a new television than a home loan product.

Mortgage brokers are great for helping you compare notes, but remember they work on commissions. That doesn’t mean they’ll give you bad advice, but it does mean you need to ask hard questions about disclosing any commercial agreements that might influence their recommendations.

Long before you find your perfect property, shop the market up and down to learn which deals and home loan products are best for your financial situation and property goals.

Comparison websites like ratecity.com.au, homeloanfinder.com.au and iselect.com.au are among the best tools to help you make an informed choice. They list more than 100 lenders and give a blow-by-blow comparison of loan product features. Use them to make a shortlist of deals right for you, and follow-up with lots of pointy questions for those lenders.

Assemble a superhero team

Buying a property is a little like going into battle. You need a world-class squad of ninjas to help you pull off the mission. No matter how smart and seasoned you are, it’s not something to do on your own.Do your homework and select a great real estate agent, conveyancer, lawyer and accountant (if you don’t already have them in your life).

Invest the time in finding these people. Ask for personal recommendations, check online reviews and interview them with a list of questions you’ve prepared earlier.

Enjoy it

Home buying is serious, intimidating stuff. It’s a big commitment that involves a lot of paperwork, furrowing and heightened emotions.

You’ll hear how you should try to take the emotion out of the process as much as possible, so you don’t get yourself into a bad deal, or make a choice in the heat of the moment you’ll later regret.

It’s sound advice, but let’s face it – buying a home, especially your first ever, is a life adventure you want to live to its fullest.

There is real joy in searching for a forever home, choosing walls and a roof that don’t just do a job, but reflect who you are in the world at that moment.

Give yourself the time and space to enjoy the search, the discovery, and the moment it becomes yours. Let yourself be proud of what you’ve achieved!

Source: realestate.com.au

As we say goodbye to 2012 and welcome 2013

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I’d like to wish everyone an awesome 2013 and thank you…. for being you.
Remember,
We will open the new book. Its pages are blank.
We are going to put words on them ourselves. Leave behind what we don’t need to carry,
GRUDGES SADNESS PAIN FEAR and REGRETS. The book is called Opportunity and the first chapter is New Year’s Day.
Happy New Year Everyone !

Homebuyer confidence rises. 2013 outlook is promising

5 Years from now

The number of Australians who believe it’s a good time to buy a home surged 11.5 per cent over the December quarter, reaching highs not seen in three years.

CommSec chief economist Craig James says the Westpac/Melbourne Institute’s latest index shows more people are keen to park their money in bricks and mortar.

“Real estate was regarded as the second wisest place to put new savings, with that reading just below seven-year highs,” James says.

Housing finance commitments slid slightly by 0.2 per cent in October, new data shows, but total home lending for the year is up four per cent.                                   Loans for land blocks rose by 17.5 per cent over 2012, which is the strongest pace of growth in three years.

“All the pointers suggest there are better times ahead for the housing market, representing good news for builders, tradespeople, material suppliers and a raft of retailers.”

On the wider economy, James says there’s good momentum moving into the New Year. In particular, forecasts for the resources sector show Australia is set to “reap extraordinary earnings” over the coming year. James says the outlook is far brighter than the “doom and gloom school would have you believe”.

Export volumes are predicted to increase substantially and the reason for a forecast drop in export values is due to the drop in commodities prices.        While general consumer sentiment fell by 0.2 points to 100 on the index, loans to buy new or used cars hit a record 1.23 billion in October.

James says the drop is disappointing at first glance but digging deeper shows “sharp divisions across the country” are to blame.  “In short, conditions are very mixed and how you feel depends on where you live and your housing status,” he says.

He believes the data suggests the Reserve Bank may opt to stay on the interest rate sidelines in the early part of 2013, preferring to see how the economy responds to rate cuts.

Source: Australian Property Investor

Negative gearing and its impact on the housing market.

HOUSEIn its most simplistic form, negative gearing for investment housing allows investors to deduct their losses against their personal taxable income.  These losses may occur when the investor incurs costs such as interest on a home loan as well as maintenance and other small expenses on an investment property. However, it is important to note that negative gearing is not unique to the property asset class; it also applies to businesses and shares in Australia.

The most important thing to realise about asset negative gearing is that it is fundamentally off-setting a loss.  Although you can claim that loss on your tax return, the investor must carry the cost of that loss throughout the year.  Ultimately, when investing, most purchasers would be hoping that rental rates increase over time and result in the asset moving from a loss-making one to an income producing one.

It is also important to note that between September 1985 and September 1987, negative gearing laws were changed.  The government quarantined negative gearing interest expenses on new transactions.  As a result, investors could only claim interest expenses against rental income, not other income.

Given that negative gearing provides a benefit to investors, we look at the impact these changes had on the investment market over the two-year period.  The first component is the impact the changes had on the rental market.

According to the rental component of CPI data, rents across the capital cities rose by 21.8% over the two years to September 1987 (the period during which negative gearing laws were changed).  The increase in rents was most pronounced over the period in Sydney (26.1%) and Perth (31.1%).  As a comparison, over the two years to September 1985, rental costs rose by a lower 17.0%.

The data clearly shows that rental growth was present over this period and it was greater than it was over the two year period directly preceding it (The above chart shows the period for which the negative gearing rules were changed and are bolded black).  Here you can see that rental growth was well above average, particularly recent averages, but it was not unprecedented with rents growing by a greater amount on an annual basis in late 1982 and early 1983.

Another important determining factor is the demand from investors over this period.  Unfortunately the Australian Bureau of Statistics does not provide information on the number of loans to investors; rather it provides the total value.  The total value of investment finance commitments in September 1987 was 41.5% higher than in September 1985.  These figures seem to suggest that at that time there was no weakness in demand for investment housing however, a clearer outcome would be apparent based on the number of loans rather than the value.

The reason why negative gearing was reinstated in September 1987 was that it was proclaimed that rents rose sharply on the back of a fall in housing market investment.  However, it doesn’t look as if investment in the housing market dried up throughout this period. Rents clearly did rise quite sharply throughout as demonstrated.

Many in favour of removing negative gearing from property say that it should occur due to the fact that housing is an unproductive asset class.

My argument is that given that housing provides shelter, if investors don’t purchase these assets, it would then be the responsibility of the Government to provide this shelter.  Ultimately, that would mean that anyone that pays taxes would be funding housing for those who can’t afford it themselves.

One of the arguments against negative gearing is that the tax deductions afforded to investors in the housing market reduces government revenue.  However, if investors did not provide shelter to those that can’t provide it to themselves, government revenue would already be reduced due to the fact that this responsibility would fall on the Government.

If we look at the recent Australian Bureau of Statistics (ABS) dwelling approvals data, it is interesting to see just how much of the new housing supply is created by the private sector as opposed to the public (government) sector.  According to the ABS dwelling approvals series which began in July 1983, between July 1983 and October 2012, 4,355,266 dwelling approvals have been given to the private sector compared to just 228,843 to the public sector.  Over the last 29 years (give or take a few months), public housing approvals have accounted for just 5.0% of all dwelling approvals.  This is less than 8,000 approvals by the public sector each year!

Over the 12 months to October 2012, 145,515 dwellings approvals were granted to the private sector (98.6%) compared to just 2,065 to the public sector (1.4%).

The most recent Census data shows us that of those homes occupied, 29.6% are rented (investment properties).  Based on this data, if we assume that without the private sector building homes for investment purposes, the public sector would have to account for 29.6% of all dwelling approvals to cover those in rental accommodation.  Over the past 12 months this would have equated to 43,684 dwelling approvals.  If we also consider that the median home price across Australia as at October 2012 was $386,000, and if the Government had to buy the land and build 43,684 homes, this would cost the Government of the day $16,861,900,480 based on the number of approvals and the median home price.

Of course this is a rather simplistic calculation and if the Government were to build homes on their own land it would cost them less as that figure includes land and building.  Also, it is unlikely that private investment in residential housing would cease without negative gearing but I would expect that it would fall.

The most recent taxation statistics data shows that over the 2009-10 financial year, $4.81 billion in net rental deductions were claimed by taxpayers.

In order for the Government to break even to allowable deductibles from tax returns they would have to be building those 43,684 homes at a cost of $110,100.  Based on the current median home price across the country at $386,000, they would have only been able to build 12,461 homes over the past 12 months or 8.4% of the total building approvals over the past year.  It should be noted that not all new builds are for investment purposes but if we assume that 29.6% are there is a significant short-fall.

When you look at these figures it is obvious why negative gearing is unlikely to be removed.  Whether the removal of negative gearing impacted investment or not, and whether it lead to an increase in rents is a secondary concern relative to how much it would cost the Government to supply public housing for the almost 30% of Australians that don’t own their own home.

These figures are not to suggest that if in the case negative gearing was removed, there would be no investors in the market however, the appeal of negative gearing is part of what attracts many investors to the market.  Without negative gearing it is likely that there would be fewer investors and therefore less private developers delivering new homes coupled with a greater need for the public sector to provide housing.  The flow on effect may also be that there would likely be lower demand for housing credit.  Although some proclaim removing negative gearing would cause house prices to fall, I would expect that new housing supply would be even tighter as developer’s struggle to achieve pre-sales for new development, this may in-turn force prices higher than they otherwise would be.

By looking into the figures in more detail, it makes good economic sense for the government to allow housing investors to negatively gear their properties so that the significantly greater cost of providing social housing is not borne by the Government and ultimately the Australian taxpayer.

Source: Cameron Kusher. RP Research

Reasons selling over Christmas can cheer buyers

Don’t fret if you’re trying to sell your home as the tinsel’s going up. There are some little known advantages to selling through Christmas and new year.

There are challenges to selling your property through Christmas and the new year. Many agents close up shop and have a break, people get distracted with presents and parties, and let’s face it… most of us are just plain exhausted.

But if you find yourself selling over the holidays, don’t despair. In some ways, it can be a good thing. You just need to know where your advantages lie.

Spring Fallout
The Spring selling season is winding down, and many who’ve parted with their home are now on the hunt for their next property.
If the season was competitive they’ll be a good number of people who missed out on their dream home and need to close the deal before the end of the year.

Buyer Accessibility
Though it’s a busy time of year, most people have more time up their sleeve to scout properties they’ve had an eye on.
Normal work schedules make viewing lots of properties a challenge. As workload and commitments slow down, motivated buyers have much more time to search through properties that appeal and get out to see them.

Less Competition
Selling at the height of Spring or Autumn means you’ll need to work hard to stand out from a crowd. There are usually less properties on the market over Christmas and New Year, meaning motivated buyers will have fewer prospects to tempt them.
By January and February, property listings are surging once more, and demand for your place may dip.
Milk the fact you’re one of a special few.

How We Feel
With less work and more merriment, people generally feeling happier and more relaxed over the holidays. When buyers are cheery, they’re in a better mood to negotiate and more likely to act. The process should be easier on all parties.
Starting a new year and wrapping the previous one makes most people reflective. We think about what we did and didn’t do, our goals and dreams. How we did on that New Year’s resolution list from last year. It’s a time of taking stock and reinvention – the perfect state of mind for moving on to a new home and a new chapter of life.

Auction Aversion
They’re a great way to produce top prices for properties in certain areas, but auctions can be intimidating for a lot of buyers out there.
Auctions tend to shut up shop over Christmas and don’t pick up until the new year. If you’re selling through that period, more than likely you’ll be selling via private treaty, which will put many buyers at ease.

Romantic Appeal
Depending on where you live and how you decorate, a home can have a unique appeal during the Christmas season. If your target market is families, you can tastefully dress your property so it lives and breathes the perfect family Christmas.
Buyers can get more emotional over the holidays, so appealing to the heart strings isn’t as taboo as usual. Embrace the season and you’ll connect with others who love it.

Rental Transition
The rental market gets noisy this time of year. Leases are up, and people are working out their next step – new place to rent, or, for many, time to finally buy. Catch them while they’re in transit.

Paperwork
Tax requirements or strategic maneuvers, end of year bonuses, administrative headaches…

There’s a bunch of reasons buyers might want or need to get their paws on a new place before Auld Lang Syne kicks in. Make it a smooth proposition for them and bundle your property as the solution to their problems.

May Santa deliver the perfect buyer for you!

Source: realestate.com.au

Rate cut likely next week, and here’s why.


THE Reserve Bank will probably cut its official interest rate next week. That will take it back to the historic low-point of 3 per cent.

This was reached at the peak of the global financial crisis. It would though, be neither surprising nor shocking if it didn’t.

Not surprising, because like all the rate decisions in recent months, this one is again finely balanced. It could reasonably go either way.
Not shocking, because the – fully understandable – bleats from retailers aside, it really would not be the end of the world, if the RBA didn’t cut.
We all get terribly fussed over 25 points, which ultimately are neither here nor there.

Another 25 points off the official rate – perhaps 20 points off most home loan rates, but also it is very important to emphasise, 20-25 points off rates on deposits which also are key to spending, as well, is not going to unleash a spending binge.
Yes, it would probably give the critical three weeks to Christmas and the two weeks through the new year a boost.
But it’s not going to miraculously save the retail industry from its much more fundamental and much more intractable structural problems.

In particular, that we were already ‘overshopped’ in the good old days before the GFC. And both the post-GFC switch from spending to saving and the explosion in online shopping – more what it does to bricks and mortar margins than the actual dollar sales lost – have made it very tough at the retail coalface.
The 25 points off the cash rate, even adding it on to the 150 points of cuts already delivered, is not going to wash away all those really fundamental structural negatives.

Now the recommendation that governor Glenn Stevens will take to the board meeting next Tuesday was formalised yesterday afternoon, as it always is.
The recommendation, in the overall board papers, however, only goes out this afternoon, so it could be changed if there was shocking new information.

On the assumption that the recommendation was to cut, ‘something’ would have to suggest we were about to be ambushed by a sudden and unexpected boom. To persuade the RBA to stay its hand again. Some commentators have suggested that today’s capital spending numbers will be critical to the rate decision.

In practical terms, that could only be in one direction – indications that capex spending intentions were slowing faster than the RBA already anticipates. That is to say, to confirm the recommendation to cut.

As Terry McCrann explained two weeks ahead of the Cup Day meeting – at which the overwhelming majority of commentators expected right up until the day of the meeting, to see a cut – that there was in fact no way the RBA would cut after the too-high underlying inflation revealed in the September quarter figures. That was confirmed by Stevens in his statement on the day of the meeting, referring to “prices data slightly higher than expected.”

That was repeated in the subsequent formal minutes. And then in a speech last week, Stevens explained the Cup Day decision to leave rates unchanged with: “in addition, the latest inflation data, while not a major problem, were a bit on the high side.”

Simplistically this might suggest that Stevens would now want to see the next quarter’s inflation data before opting for a cut. That would postpone things to the first meeting back for the new year – in February.

A series of points counter that. First, the inflation genie didn’t even stick its head out of the bottle, far less leap out – it was only a “bit on the high side.”

Stevens needed to separate another cut from the inflation data, but only needed an immediate separation. A rate cut decision would go straight back to being ‘live’ at the next meeting.
That’s on the absolutely critical assumption that the RBA believed a further cut or cuts was likely to be necessary or even just appropriate.
And that was said precisely in the minutes: “Members considered that further easing may be appropriate in the period ahead.”

As Terry McCrann explained two bits of data would be critical. The jobs and jobless numbers and the wage inflation data. The jobs data was softish without being dreadful. It didn’t demand a rate cut, but it certainly ‘encouraged’ one. Provided wage increases were not threatening.
The subsequent wages data was lowish enough to allow the RBA to cut if it wanted to. But not that low, without being threatening, to make a cut a certainty.

Add it all together, a cut next week – rather than leaving a four-month gap from the last cut in October to the next meeting in February – is the ‘no regrets’ option.

Source: Terry McCrann Herald Sun