Why Property Investors should Invest in Banks and other Lessons we Learnt from the recent Rate Cut

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Australian interest rates have been on a declining spiral for a number of years now and the Reserve Bank recently cut Australian interest rates by .25 basis points to a record low of 1.5% due to fears of a weakening economy. What are the lessons we can learn from this latest interest rate cut?

Banks gouge margins and make money from rate cuts

Property Investors should buy shares in banks as they are part funding the banks profits. On one hand the bank is saying that they cannot pass on the full amount of the rate cut due to increases in their costs yet in their recent reports to the market banks are showing improved profits and higher dividends to shareholders. Banks can easily add to their bottom line simply by siphoning off part of an interest rate cut and they can get away with this because 0.125% does not have a significant impact on the individual home owner or investor, so we might complain a little but inevitably take no action because of what I call ‘can’t fight city hall syndrome’. We feel we have little say and will not take the time or go to the expense to move our business elsewhere for a small amount, and the banks know this. However, this small amount converts into millions of dollars of revenue for the bank over its loan book portfolio.

More Hot Air from Governments to bring Bankers to account

Whenever banks do not pass on the full rate cut the government deflects by calling for an enquiry into the system and huffs and puffs about the fact they have no control over what the banks do and don’t do from a business point of view, with the opposition then adding that Australia needs a Royal Commission into the banking industry.

Australia has a strong banking system however there should be strict controls placed on interest rate gouging. When the banks say we are not passing on the full interest rate cut to consumers because we are being squeezed with costs, what they are really saying is we can’t reign in our costs of running our business and this strategy then becomes low hanging fruit to increase profits. I have many contacts working in the banking system and from discussions I am always amazed at the amount of money they spend on a whole range of things within their system. I suppose you don’t have to worry about your spending if you can recoup costs that easily by gouging rates, it fosters poor management from a spending point of view. Government policy should be implemented to make the banks more transparent and accountable on why they have not passed on the full amount, we should not have to pay for their inefficiencies.

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The Property Cycle has turned

Based on Reserve Bank comments: “We have taken careful account of developments in the housing market, noting the effects of supervisory measures to strengthen lending standards, the easing in housing credit growth and the abatement of strong price pressures,” the statement noted. All this suggests that the risks associated with high and rising household sector debt and rapid gains in housing prices have diminished. “While one source of data recorded strong growth in housing prices in April and May, that growth appears to have been overstated and other sources suggest that housing price growth was modest over those and more recent months,” the RBA papers stated.

Home Ownership is more affordable

The good news story around low interest rates and the potential turning of the property cycle is that it will make home ownership more affordable for new entrants. If property values have peaked and interest rates are low for an extended period of time it allows the younger first home buyers the opportunity to catch up, to save a deposit and borrow the money to purchase a property.

The Impact of the Chinese Property Market

The Reserve bank noted that “A substantial slowing in demand in the Chinese property market would pose risks for property developers and related industries, including the steel industry,”

Why? China take up a large portion of the property investment in Australia over recent years and if there was a downfall in China many of these investors may pull out leaving an oversupply of property and taking away the demand in the near future, but of even more significance is that a slowdown in Chinese construction will reduce steel consumption which in turn will reduce demand and prices for Australian iron ore and coking coal, putting further pressure on shrinking national income.

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There are many lessons to be learnt from the low interest rate cycle we are currently experiencing, remember that although the bank may not have passed on the full rate cut you should still negotiate, as the banks are competing aggressively for business. If you have a good credit rating and repayment history or a good income, pick up the phone and ask for a better deal otherwise don’t be afraid to let your feet do the talking.

What do you think? David Naylor

David Naylor

Disclaimer: This article contains general information; before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs. Click for more detail regarding this disclaimer.

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