RBA rings alarm on high debt levels
Risks to financial stability could be building as house prices and debt levels keep rising, the Reserve Bank has caution...
A predicted hat trick of cash rate cuts could create favourable conditions for property investors, according to one expert.
What's pointing to a rate cut?
A number of signs are pointing to multiple rate cuts occurring, according to Right Property Group director Victor Kumar.
“You don’t need to be Einstein to understand that the economy is slowing down, and that market sentiment has changed rapidly,” Mr Kumar said.
He claimed that according to official retail turnover figures, growth was at just 0.2 of a percentage point for consumer and business discretionary spending, a sharp decline compared to the norm.
“When people don’t feel wealthy, they batten down the hatches and reduce their spending,” he said.
Mr Kumar also claimed that APRA also has a hand in the current economic situation with the tight lending environment
“They are now trying to loosen those screws, but the damage is done to a degree,” he said.
“That’s where the recent interest rate cut comes into play, because it sends a clear message that our economy must start moving again sooner rather than later.
“Of course, one interest rate cut is not going to remedy the situation overnight, which is why the Reserve Bank governor has already flagged more rate reductions in coming months.”
Manage your response
With the cash rate predicted to drop further and with changes in serviceability, some investors may be tempted to borrow more than they are able to manage, but Mr Kumar warned against borrowing more than investors are able to handle.
“Regardless of the credit climate, it is never a good idea to borrow more than you need or more than you can handle,” he said.
“That will always end badly in my opinion.
“Especially since the next round of significant rate changes after these cuts will be increases, which will eventually bring rates closer to 5 or 6 percent.”
In fact, those who borrow above their financial capabilities can be placed into a position where they will need to sell properties quickly – potentially at a loss.
Coming out on top
If current investors play their cards just right, however, they could find themselves in a profitable position, and should not let a few instances of a softening economy get in the way of riding the potential incoming upswing.
“There are a quadrella of market positives in low interest rates, low inflation, low market sentiment and low property prices in most key markets,” he said.
“This will ultimately result in higher rents and yields over the short to medium term as well as stronger negotiating positions because of fewer buyers.
“When rents and yields grow, as well as the stimulatory economic measures previously mentioned, there will be new life in the market which has the potential to supercharge your equity.”
The state of the economy
There are a number of indicators that show the overall economy is softening.
For example, Mr Kumar pointed to the latest quarterly inflation result, which remained at 1.3 per cent – a distance from the RBA’s target of 2 to 3 per cent
He also cited the consumer price index, with the all groups recording no movement in the most recent March quarter.
The current rate of unemployment is also “stubbornly stuck” at 5.1 per cent, Mr Kumar said, which he said was holding back economic stimulation.
“We all know that a lower unemployment rate will drive competition for staff via pay rises and higher wages which, in turn, will increase inflation and strengthen our economy,” he said.
Growth has also been subdued in Australia’s most recent gross domestic product figures with just 0.3 of a percentage point over the March quarter.
He added that economic struggles were likely to be exacerbated through a potential trade war between China and the United States, which would then impact Australia as a result.
However, Mr Kumar said that these indicators are not being ignored by those with the power to steer the economy into more positive territory.
“That’s why we have a swathe of stimulatory measures under way, including tax cuts hopefully from the start of the new financial year,” Mr Kumar said.
Interest is the amount of money charged by a lender or financial institution for a loan, which is calculated as the percentage of the principal amount paid over the loan term.