RBA Mission Accomplished!

[Michael Croft]

Hi all,

IMHO the RBA has achieved one of it's stated objectives which was to bring/pull the housing/IP market back into line. This is something they have been sabre rattling about for some time but the small rate rise last month I believe has done the trick.

A quick poll of the agents I deal with in (5 states and one territory) has confirmed the following;

- lookers are fewer and further between (numbers at exhibitions down)
- private treaty buyers are much slower to commit
- exchanges are taking longer
- fall overs (buyers pulling out) are increasing
- auction clearances are down slightly but what the figures don't show is the smaller numbers of bidders to achieve the result
- unseasoned investors are getting nervous (property managers getting calls from owners with end of leases looming)

In short the agents are having to work much harder for the sales achieved.

Personally I don't care either way if rates rise more but I my gut is telling me the market is far more sensitive than it used to be and is reacting quicker than it did in the last boom.

It used to be that (still taught at Uni) that monetary policy is a "blunt instrument, heavy handed and slow moving". Well me think times have changed and the economy is reacting in a fraction of the time it took in the last cycle. I just hope the RBA's feed back systems have evolved at the same pace (perhaps Pitt St can illuminate) other wise the over correction will be painful for some - and yes, profitable for others.

Anyway just some observations from the field.

regards, MC

 

[Aceyducey]

Thanks Michael, I always respect your views.

We're heard & seen the same in the markets we're following.

There is still a question as to whether the Reserve Bank officially realises their campaign has been successful and holds interest rates steady.....part of the heavy-handiness of monetary policy is due to the lag in statistics used by instrumentalities such as the RB to set their policy.

A few more rate rises would definitely be overkill - which is NOT RBA policy

Cheers,

Aceyducey

 

[simonjulie]

Hi Michael

It certainly seems that the market has cooled quicker than might have been expected.

I put a house on the market in Canberra some weeks ago and there seems to be less interest each week. My agent tells me that things have really slowed but just to make it more interesting my PM tells me that there are around 900 rentals available in the ACT at present. Quite bizarre - a glut of sale and rental properties all at once!

regards
Julie
___________________

Audentes Fortuna Juvat

 

[Michael Croft]

Hi,

It amazes me that a 25 point rise has had such an effect on the market and so quickly - some of my passions are international political economy and psychology and still I'm amazed!

What ever happened to being prepared for a 200 point rise and using this as a calculation for long term buy and holds? Or is it the Johnny come lately speculators (who call themselves property investors) who are nervous. Those banking on caprital gains in the short term (1-3 years) had better do their due diligence OR ELSE!!! As for the deposit bond strategy - forget it - and he's in receivership again.

Canberra is an intersting market and I have often used it as an acid test of public sentiment on economic matters. Why? A highly educated public, well informed and (overly)sensitive to political/economic trends. Highest average disposable income and a high proportion of investors to name but a few. In short a bunch of affluent, anal retentive, nervous nellies, with a wait and see approach. I have noticed that in the last 3 cycles Canberran's have stopped investing/buying property first/sooner than in other capitals and are slower on the up take too.

The 'stats' on the 'glut' in Canberra are anecdotal and not entirely accurate. Do a split on units verses houses and you will find it's generally true for units but that well located family homes are renting out well.

regards, MC

 

[MarkB]

On a quick read I pretty much agree with all that has been said thus far.

Certainly the "property market" has, for whatever reason, reacted strongly to the last rate rise.

Though perhaps it was the case that the property market's time as the investors darling was nearing an end and the spectre of interest rate rises is enough for some to move their capital?

(I'm not saying... just posing the question).

I also think that given:

- the unhelpful speculation of BIS

- the experience of the late 80's, and

- the RBA's own warnings.

That the message was quite clear.


Obviously the "property market" has been a major factor in RBA decisions of late (including the decision not to do anything).

However, we should all remember that, for the RBA at least, there is more to life than the property market (in spite of what the REIA and the HIA may cry about).

If the rumours and speculation are to be believed we will see some very strong GDP growth figures for the september quarter will be announced very soon.

While "asset price booms" may come and go, in between (and even throughout) the RBA is tasked with responding to economic fundamentals in its key role in macroeconomic management.

We should never forget this.

MB

 

[HowDo]

Hi Michael Croft and welcome back. It's been a long time - don't be a stranger.

 

[Jas]

The thing that gets me about this is the effect one rate rise has had.

Assuming that people have only started to buy in this boom. Even within it, rates have gone up and down.

It just seems to be that everyone thinks this rate rise is the one signalling the end of the boom and the start of 17% rates...

Jas

 

[simonjulie]

Originally posted by Michael Croft


In short a bunch of affluent, anal retentive, nervous nellies, with a wait and see approach.

Michael Croft you are hilarious - you hold such a fond view of your neighbours.

I don't believe that there is a serious rental glut in Canberra but interesting to note that there is so much on the market. I do agree that well located property will always do well.

It is interesting that the property market has slowed so quickly but in the big scheme of things the optimist in me believes that wherever there is activity there is opportunity.

My view may seem simplistic but by using the KISS principle I can always keep an undaunted eye on the big picture.

Julie

 

[Peter_Tersteeg]

The reaction to this rate does seem rather strong. When I first started investing in property (a mere 3 years ago), the variable rate was around 8%. At the time, with the deals available, this didn't seem like a problem, in fact, my first property 6km from the Melbourne CBD was positivly geared.

If people are worried about a rise this month, then perhaps they are extending themselves too far. If the market does cool for a significant period of time (ie, the boom ends), great. That will allow time for a correction in rental returns which for me will make investment more viable.

 

[Michael Croft]

Hi,

Agree with Pitt St that property was probably nearing the end of it's cycle anyway and was probably kept alive longer than anticipated by: RBA inaction on rates (sabre rattling aside), popular culture latching on to property (how many TV shows are there?), seminar gurus, Property Investor mag, this forum, 9/11 and the war on terror, and a few others I've forgotten.

I stuck my neck out and made a prediction on rates and when the boom would end about a year/18 months ago - how did I go? I also predicted that the boom would end with a whimper and flatten out if there was no market 'shock' to trigger the end. I'm finding it hard to believe that the 'shock' is a 25 point rise - that's all. So a whimper it probably is; and unless I'm wrong this is the RBA's preferred outcome. However if we get the mooted 2 or 3 more 25 point rises within 6 months, given the 'shock' of one 25 point rise, the brown stuff will hit the fan.

- As for my mates at Shrapnel, they have got their property predictions right once in their last 4 - unhelpful and wrong!
- The 80's is a lifetime ago for many of the current crop of investors. Like the share market crash of 1987 they probably believe/hope that the feedback loops have improved for property as they have for shares - if the 80's has any relevance to them at all.
- The RBA and before them The Australian newspaper (Alan Wood)did warn all comers that property was an over valued asset class.

We are at the beginning of the business/share cycle (if any remember the economic clock?) and rates should stay around 7% for several years as this gains momentum. However I think the RBA has changed from reactionary to being proactive (predictive) in the market. It is going to attempt to smooth out the bumps in the biz cycle in advance. Nothing wrong with this in theory and there are some bright people pulling the levers, but chaos theory comes closest to market economics and I have my doubts.

Anyway just some musings along the way.

regards, MC

Oh and I love Canberrans, really I do! They are soooo predictable, and my only friend is from Canberra too.

 

[MarkB]

Originally posted by Michael Croft
However I think the RBA has changed from reactionary to being proactive (predictive) in the market.

It is going to attempt to smooth out the bumps in the biz cycle in advance.

Nothing wrong with this in theory and there are some bright people pulling the levers, but chaos theory comes closest to market economics and I have my doubts.

Yes, yes and yes!

Particularly if those "bright people" rely on too much theory - "Ahh, but the textbook says that this happens when you do this".

If only economics (humans) were that simple.

I am reminded of a quote from the series "Walking with Cavemen".

According to that series, one of the main reasons why our ancestors needed a bigger brain was to understand the most complex problem of their time - which remains the most complex problem of our time - understanding human behaviour.

MB

(btw. Good luck RBA!)

 

[XBenX]

Originally posted by Pitt St
Yes, yes and yes!

Particularly if those "bright people" rely on too much theory - "Ahh, but the textbook says that this happens when you do this".

If only economics (humans) were that simple.

I am reminded of a quote from the series "Walking with Cavemen".

According to that series, one of the main reasons why our ancestors needed a bigger brain was to understand the most complex problem of their time - which remains the most complex problem of our time - understanding human behaviour.

MB

(btw. Good luck RBA!)

Ive only been lurking of late ppl - but I had to post on this.... nothing interesting to say though - other than the fact I wholeheartedly agree

 

[Mr Ed]

We are at the beginning of the business/share cycle (if anyone remembers the economic clock?)

We are all profesional investors. The economic clock cannot be under estimated.

It all goes in cycles just like clock work.

Mr Ed

Ironically I rely on property for my lively hood!!!!!

 

[geoffw]

Originally posted by Mr Ed
Ironically I rely on property for my lively hood!!!!!

Lively hood- an active villain

Livelihood- Means of support; subsistence.

 

[Michael Yardney]

Originally posted by Michael Croft
Hi,

It amazes me that a 25 point rise has had such an effect on the market and so quickly - some of my passions are international political economy and psychology and still I'm amazed!

......
regards, MC

The last boom ended just as suddenly. Agents who were active then remember that it was in the middle on November 1989. One weekend auction clearances were high.

Then there was an interest rate hike.

Market sentiment changed, aAuction clearances fell dramatically the next wekend and the rest is history......

 

[see_change]

Michael and Michael

It's nice to see people who have significant experience getting involved in the debate about the recent change in the property market.

Obviously the change hasn't filtered through to the general population ( though the RBA have heard about it)

On morning TV today , one of the commentors said that part of the reason they had to increase rates again was that the first increase had had no effect....

Michael Y , my recollection about the last market peak was that it occured at a time when there had already been several increases in rates, and many people had been buying in order to lock rates in before they went higher.

Do either of you have any recollection as to whether this was the case or not.

See Change

 

[Michael Croft]

Yeah, I was there! Up to my eyeballs in renos, developments and debt - came very close to losing the seat of my pants The change happened almost overnight in Sydney and Melbourne but the other capitals spluttered along until the 'recession we had to have' and these kept me afloat.

This time the reaction seems universal. Even Perth which seemed to have it's own cycle independent of 'the east' is reacting. Perhaps the information revolution is finally affecting the rest of the economy? Faster and more accurate info, centralised news/wire services etc.

A funny story but true from back then: I was selling a house in Braddon ACT when the 'world's greatest treasurer' was running the show and rates were near an all time high. One hot prospect (a world famous pianist) was going to buy the house because he could walk to the CBD and fit his 2 grand pianos.

At crunch time he says words to the effect 'I don't know much about these things, so can I bring a friend through?' No problem I think. Two hours later a commonwealth car 'C2' pulls into the drive and out gets Paul Keating. He then walks around the house in expert mode advising his friend............ 'it's a loverly house, but now is not the time to buy - interest rates are too high'. I had to bite my tongue and not shout 'And who's bloody fault is that!'

Anyway as MY says, the rest is history........

Regards, MC

 

[Puppeteer]

My wholly uneducated opinion (and don't go asking for proof - coz this is 100% biased opinion and conjecture) is that the rising interest rates are just the variable that tipped the balance to confidence in the residential property market.

I think that there are a lot of other items that have been getting income of average Australians, and that even if rates hadn't moved that the so called property boom would have slowed anyway.

The way I see it is that the sharemarket has turned the corner and confidence is growing. My feeling is that the majority of the heated housing market was caused by first home buyers using the FHOG to get into their own house (often with far bigger mortgages than is prudent - but that's another issue entirely).

For many of these people there was no savings plans in place , before their first home purchase and there is no net savings now either. There is a high level of retail debt associated with furnishing the house with lots of gadgets. Because of this banks won't lend more money for future properties.

These first homebuyers, still wanting to jump on the investment bandwagon are turning to shares and managed funds in a rising sharemarket.

Those believing that superannuation will be their saviours in retirement are taking advantage of the rising aussie dollar and are buying toys for their houses and recreation. Cars, appliances, big TV's etc.

Still others are starting families with one partner taking extended leave to look after the children, again reducing disposable incomes.

Among my circle of aquaintances these seem to be pretty typical experiences, with almost all couples being happy to buy their first house (often beyond their realistic means) and not having any ambition for further houses.

Very few of them would have had the capacity to buy a house without the FHOG regardless of stamp duty or anything else. Almost none of them had any savings, and several used credit cards for the remainder of their deposits.

Basically I think that the government has very effectively used the FHOG to pull the next 2 years of first home buyers forward into the last 2 years to prop up the economy, and frankly I think that the number of first home owners that are capable of financing houses is diminishing quickly, back to more sustainable levels.

When the FHOG is discontinued (and I believe that it will be, though probably along with some reduction in stamp duty) there will be somewhat of a glut as first time investors will need to get back to saving money rather than taking handouts to afford property.

For me, the rising interest rates are a bit like puting a bullet in a dying horse. Yep it's gonna finish it off, but nothing that time wouldn't have taken care of shortly anyway.

Having said that though, I'm still pretty upbeat about the future. I think that generally things will slow to low growth rates, maybe with some areas going backwards in the short term, with growth accellerating in 2 to 3 years, but at more modest levels than what we've seen recently.