The RBA has not increased interest rates and does not look as if it has any intention in doing so in the short to medium term. In fact, our reading of its position is that while it is in “wait and see” mode, there is potentially a slight bias that it is inclined to move rates down. Its “wait and see” attitude is a reasonable position to take at this point in time as there is no clear direction in the global economy and the Australian two-part economy is contradictory. The RBA tells us that current policy settings are delivering reasonable constraint but uncertainty in the consumer space could continue to dampen demand and weaken inflation pressures.

In the past few days, there has been a renewed perception of some order of global stability taking place as our stock markets rebound. Perhaps it is true that it is more greed than a valid assessment of the global economic situation. Nonetheless, the rebound in the markets will be somewhat reassuring to the community at large. However, in the latest release of RBA minutes there is no sign that stability on its own is sufficient to cause the RBA to return to a more positive rate setting bias. It seems that for them to move in this direction the following are needed:

a)       Pickup in domestic retail activity indicators;
b)       Resumption of the downtrend in the unemployment rate;
c)       An increase credit growth;
d)       Rising commodity prices; and
e)       Rising exports.

If the RBA is unable to make up its mind on what is going to happen and what is needed, then it is no wonder that the community at large is equally confused. This confusion has manifested itself in poor retail sales and corrections in housing values, particularly in cities where there is stock surplus. It is also just starting to feed through to a loss of jobs with the unemployment rate marginally increasing. For the RBA and government, this is something they will need to watch carefully.

The RBA looks as if it is more likely to reduce rates rather than increase them. In our view, we have probably reached the top of this interest rate cycle and from here rates will be decreased. We expect an adjustment to take place before the end of the year in the order of 0.5 per cent and the rate to remain at the reduced level for the following 12 months.

Until next month
Best regards,
John E Edwards,
Founder and CEO, Residex

About John Edwards…

John Edwards is CEO of FindMeaHome.com.au and Residex, and is recognised as Australia’s leading property researcher.

Indications are for further corrections being more likely than not. In fact without any government stimulus (which we don’t expect) that the correction process across Australia has around six to nine months to go.

SYDNEY

Market performances are not uniform. There are some areas that are just starting the correction process while others have move beyond this process and are presenting growth. Sydney falls into this later category with this market having the most significant stock shortage at 20,000+ dwellings on our estimations.

BRISBANE

The worst performing capital city market is Brisbane. Its annual growth rate has deteriorated further since our last report and has now recorded its worst annual growth rate on record at -6.0 per cent.

Given the corrections taking place in this market, the stock position in Brisbane is not as one would expect. Aside from Sydney, Brisbane is the only other capital city where a potential shortage of stock remains. The only rational reason one can point to for the correction is the negative sentiment being generated out of the Gold Coast market and the natural disasters earlier in the year. We continue to believe that this market will move to growth in the short term as the impact of the stock shortage is felt and the state’s economic performance improves following the natural disasters.

GOLD COAST

The Gold Coast also continues to adjust and it too has posted its worst recorded adjustment. The correction for the year was -9.9 per cent while in Southport the correction has become significant at -11.8 per cent. Corrections of this magnitude are very abnormal and rarely seen. For example, a correction of this magnitude was last seen in Sydney in 1930.

MELBOURNE

Melbourne, until recently, has been a “star” of the Australian housing market with its performance being exceptional. However, it is currently presenting as if there is a serious risk of falls. The city is in the early stages of the correction phase and is a market where there needs to be caution. Many people will fail to realise that this market is correcting and will be focused on the recent quality returns. The correction process is likely to take the best part of two years as there is a significant stock overhang (we calculate the surplus to be in the order of around 20,000+ dwellings).

Weekly rental costs in Melbourne are now similar to what they were in July 2008. The lead indicator that the correction phase is almost over will be an increase in rental costs. Rental yields are now the lowest in Australia (3.38 per cent for houses and 4.18 per cent for units). Yields need to be close to 4.5 per cent for houses and 5.2 per cent for units). This suggests that there is the potential for this market to correct by something in the order of 12 per cent over the next two years with a rental increase of around 17 per cent, or $64 per week. We saw a similar need for correction in Perth and the correction has taken place in recent times.

PERTH

The corrections that have taken place in the Perth market are significant. The peak median value of a house was $521,000 in March 2008 whereas today it lays around $471,000 – a total reduction in value of 9.6 per cent, or $50,000. Rental yields and weekly rental costs are increasing, indicating that the surplus stock position is reducing – we currently calculate the surplus at about 4,000 dwellings.

There are further corrections to take place however they are unlikely to exceed five per cent. Before property values increase, we should also expect weekly rentals to increase in the order of $425 per week, placing rental yields in Perth at something in the order of 4.9 per cent.

Until next month
Best regards,
John E Edwards,
Founder and CEO, Residex

About John Edwards…

John Edwards is CEO of FindMeaHome.com.au and Residex, and is recognised as Australia’s leading property researcher.

Mark Taylor is the Founder and Director of Keys To Success Club.   A property investor in his own right, Mark helps other people succeed in property investment by connecting them to property experts through Keys To Success Club.

Mark Taylor is the Founder and Director of Keys To Success Club.   A property investor in his own right, Mark helps other people succeed in property investment by connecting them to property experts through Keys To Success Club.

Mark Taylor is the Founder and Director of Keys To Success Club.   A property investor in his own right, Mark helps other people succeed in property investment by connecting them to property experts through Keys To Success Club.