Whenever anything reaches a record high or a record low it creates interest. And with the current low interest rates, some media have been tempted to say that the economy must be in the worst state ever, but this simply isn’t true.
We need to look at interest rates in context. In 1991 we had one of the worst recessions and we saw the rates fall to cyclical lows. These were lows of between four and five per cent at the time. In that recession, Australia was in a far worse economic circumstance than today – unemployment, for example, was at 10.5 per cent then.
We had two banks that almost went bust, and all three major commercial television networks were in receivership.
Yes, the headlines we’re reading today imply that we are in the worst economy ever, but context is that our low interest rates are due to our inflation rate being lower than it has ever been before.
In fact, we anticipate at least one more rate cut this year. The rates have already come down two per cent from their high point, and mortgage rates have come down about 1.6 per cent. At the moment, we’re being influenced by three main factors; the mining slowdown, the Australian dollar and the housing market.
A question mark still hangs over the mining slowdown, and whether the rest of the economy is strong enough to sustain it.
In terms of the Australian dollar, we know that if it comes down sharply, there’s less pressure on the Reserve Bank (RBA) and they most likely wouldn’t cut again. However, if it drifts down slowly, which I believe more likely, the RBA will still be encouraged to cut. I don’t think it’s going to fall fast enough, but this is really the ‘uncertain’ factor at the moment.
The housing market is looking a lot stronger, but it’s still a long way from boom conditions. Since the first rate cut of this cycle, house prices are only up around two per cent nationwide. In the past three rate cutting cycles, house prices were typically up by about 18 per cent at this time in the cycle.
That said, we don’t necessarily want a return to ‘housing boom’ conditions. A quick return to huge growth could stop the RBA from cutting interest rates again. It’s best if we see a sustained but moderate recovery, leaving time for first homebuyers to return to the market.
There are deals [mortgage rates] today of around five per cent or less, and if economic conditions improve over the next 12 months, you might see some of these deals start to disappear – regardless of the RBA’s movements. As investors tend to hold for the long term, consider what deals are available at the moment, as the opportunities might not be around for an extended period of time.
Shane Oliver, Smart Investment Property, July 2013 issue