What does an interest rate drop mean for the property market?
By Ed Chan
The RBA cut rates by a further, 25 basis points on Tuesday, June 5.
This should not have been a surprise especially when one considers what is happening in Europe and the US and our own retail sectors, it would have to take a toll on public confidence.
I would say it’s all about the rest of the world and we needed a buffer to help us through the next few years of turmoil.
The US jobs came in worse than expected, and there is no short-term solution in sight for Europe, and its long-term outlook is bleak. I would anticipate 10 years of no growth in Europe.
The US will enter a long period of small to moderate growth as it attempts to pay down their debt.
Fundamental to both is that they have an ageing population and similar to Japan, which has had no growth for about 21 years, both Europe and to a lesser extent the US have record levels of debt. An ageing population means spending decreases, and when spending slows economic activity slows, which means higher unemployment and lower tax revenue. Japan had an extremely tight immigration policy, which means very few immigrants were allowed into the country.
Natural births to replace an aging population have two disadvantages.
It generally takes 21 years of investing into a newborn before he or she is old enough to work, plus a further two years training on-the-job to attain a skill before he or she can start contributing.
This is slow and a highly costly process. Also, the number of children per household has dropped over the years. There is also no guarantee that job sectors that have skill shortages can be filled, because there is no guarantee that Australians will go into those areas even after they have attained the necessary skills, qualifications and experience.
Immigration, on the other hand, has many advantages for a young country such as ours.
It means one can select the skilled people required and only allow those who have those skills into the country in areas where we are experiencing a shortage in, or restrict their entry conditions to areas that have a skill shortage. They are already trained and the training paid for by another country; they are immediately productive and can pay taxes; they also create an immediate demand for services such as homes, cars, schools, food and other services creating economic growth and prosperity where as an ageing population reduces their spending as they have less need for things such as larger homes and cars and school fees for education, etc.
In Australia unlike Europe, Japan and even the US we have a robust and healthy immigration policy allowing in around 250,000 to 350,000 people annually. Our unemployment rate is 4.8%, and this is considered full employment. Much of this can be attributed to Australians not being prepared to travel to take up jobs in mining towns and other areas that are perhaps hard to get to or other occupations that perhaps Australians are not prepared to accept. One will never achieve 0% unemployment.
Despite fears that immigrants will take Australian jobs and I have heard this statement for over 40 years, the fact is that our long-term average unemployment rates have always sat at around 5.5%. This is considered full employment. Naturally there are times when it has hit around 10% but it generally does not stay at that rate for very long as long as there is economic growth.
However one must be careful and selective about immigration because it can change the nature and landscape of the country. Allowing people into a country with different values and beliefs can cause social unrest. One must balance economic wellbeing with the type of social fabric we want the country to become. However that simply comes down to tighter government policies about the type and quality of people that are permitted to come into this country.
Economically there are very sound reasons for a healthy immigration policy balanced with a socially responsible selection process should provide the best outcome.
While Australia does have a two-speed economy, certain industries such as mining are doing extremely well where other industries such as retail are not doing so well. With what is happening in Europe and the US, global market sentiment is a huge factor that affects our economy. This is proven true by our record savings in this country since the GFC as the general population adopted a defensive stance such as savings and paying down their debt, as opposed to an aggressive growth strategy such as leveraging through increased debt.
I believe the RBA has got it right with the recent 0.25 percentage point drop in interest rates leaving it more room to move if the world economy deteriorates further. This will give the property market a little optimism.
There is also a two-speed property market. The higher end market has continued to drop in value albeit it has slowed and some say even bottomed but the lower end market has shown stability and in some areas have shown growth. However when one averages all the markets together it distorts what is really happening at a micro level. Hence when the averages are reported that house prices in the Australian capitals fell 1.4% in May to the lowest level in six years it really is a distortion of what is happening at a micro level. It simply means one has to be much more careful and selective and do much more research to buy properties that are doing well.
Gone are the days when one could buy any property in any area and you could sit back and watch your properties grow in value.
Ed Chan is a founding partner of Chan and Naylor accountants and a leading property tax specialist. He has co-authored three best-selling books as a seasoned property investor who understands the relationship between property investment and tax.
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