Rates Could Fall Again Before They Rise

Whether you’re a homeowner, a housing investor or are looking to break into the market, the housing sector has been on your radar.

Even if you despise the housing industry, the Australian share market is so sensitive to it that you can’t afford to ignore it!

At the end of 2017, we saw the market slow, and 2018 has continued that trend with falling prices. Nationally, year-on-year the market is down 4.6%.

The construction of huge numbers of apartments in major cities has seen a slowdown in demand, prompting price falls in units. So both house and unit prices are down. Australia’s two major cities, Sydney and Melbourne, have been hit hardest.

Population growth is booming — find out how you can make the most of a massive global infrastructure rush in this free report. Get access now.

Interest rates stagnant

Now, falling house prices usually come hand-in-hand with an increase in interest rates. Higher interest rates means fewer buyers, with less to spend, which has an obvious effect on the market. And 2018 has been no different. While the RBA has yet to raise interest rates, three of the major banks (ANZ, CBA and Westpac) have.

On Tuesday, the RBA kept interest rates level. While this wasn’t a surprise, it is interesting to see how long the RBA will hold onto the current rate even as housing falls.

While the Fed in the US may increase their interest rates a couple more times before the end of the year, the RBA looks set to keep Australia’s at current ‘emergency level’ lows.

For the past two years rates have remained stagnant. Now, according to the ABC’s business editor, Ian Verrender, 2019 may prove to be another year of low rates. 2020 is the earliest prediction for a rates hike.

But before then, could we see rates go even lower than they currently are?

The RBA will tell you that the next move will be an increase in rates. But for the past two years that hasn’t been the case.

According to Verrender, the line of thought by Phillip Lowe and the RBA is something akin to this:

 ‘…the economy is growing, inflation is recovering, albeit at a slower-than-expected pace, unemployment is low and wage growth ultimately will recuperate.’

Aussie housing market continues to fall

But since 2011, wage growth has stalled and fallen. Currently, household debt to income sits at 199%.

As Verrender stated, ‘While most economists would disagree, there is every chance the next move in interest rates could well be a cut. And our deflating housing market may well be the trigger.’

Auction clearance rates are barely passing 50%. Sydney prices have now fallen 7.4%, according to CoreLogic. And Melbourne has fallen 4.7%.

The only capital city booming is off the mainland, with Hobart up 9.7%.

You can see the national house price decline playing out in the graph below:

MoneyMorning 09-11-18

Source: CoreLogic, Morgan Stanley Research

[Click to open in a new window]

However, while demand is falling, the pace at which people are building houses remains the same. As you can see in the graph below:

MoneyMorning 09-11-18

Source: ABS, Morgan Stanley Research

[Click to open in a new window]

Other sectors of the economy are also suffering. In some cases, this could be directly linked to the drop in house prices.

The RBA’s rosy outlook

Although it is widely known that Australian households are the most indebted in the world, the RBA still forecasts a bright picture for Australians in the near future. Provided that inflation continues to be steady and manageable.

That’s not uncommon for the RBA to say.

Household consumption makes up 60% of GDP. If indebted Australians, trapped in expensive mortgages as the value of their home plummets, stop spending to make ends meet, economic growth will suffer.

So what does that mean for interest rates? Another cut that could see the RBA drop rates to below 1%.

We’re already at our lowest rate in history. Even further rate cuts will bring into question the RBA’s credibility, and prove that Australia’s economy is a lot worse than they have been leading you to believe.

This week in Money Morning

In Monday’s Money Morning, Harje explains how in just one month, eight months of gains quickly evaporated. Not only did our market fall, US investors, European investors, tech investors and commodity traders all felt the October Effect. (To some, the October Effect is a real phenomenon, believers are convinced October is a terrible month for stocks. The 1929 crash started in Oct). Declines this year just add another data point to the theory. But it’s not October you should blame for our recent decline. Harje believes you should blame those who allowed asset prices to get so high in the first place. To find out more, go here.

In Tuesday’s Money Morning, Harje looks at how investors don’t have a shortage of reasons to sell stocks today. That’s why Harje’s betting on more market declines ahead. Stock indices in China are among the worst performers recently. Because these Eastern markets are dominated by mom and pop investors who are largely driven by sentiment, it could take some time before buyers make their way back in. Harje goes on further to explain that there’s volatility in all markets currently. To find out more about strategies in volatile markets, go here.

On Wednesday, Harje discussed Indonesia’s growing smartphone market. A little over half of Indonesia’s 240 million people are connected. And about 45% of them own a smartphone. Yet even with connectivity and a lack of mobiles, Indonesia’s e-commerce industry is booming. One company cashing in on these Southeast Asian consumers is Bukalapak. You could say they’re the offline ecommerce bet in Indonesia. They work with around 300,000 warungs, which are small, family-owned kiosks. These warungs sell daily necessities to locals. Instead of building out physical stores, Bukalapak recruits tens of thousands of outlets (warungs) over night. Before long, Indonesia will be drowning in smartphones. With which, the locals will do everything else along with shopping online. To find out how you could potentially benefit from this growing market, click here.

In Thursday’s Money Morning, Harje looks at the online gaming industry in China. It’s the latest industry to come under the attack of China’s Communist Party. If you’re unfamiliar with how the industry works, before any game can be released, it needs to get the OK from policy makers. That way, the Chinese government can make sure nothing unsavoury makes it into these games. For months, policy makers have approved zero games. There is a huge hold-up as China tries to push their younger generation away from games and towards computer engineering or artificial intelligence. China doesn’t want their future generation hooked on video games. They want them pursuing the socialist Made in China 2025 plan. To find out more about how this could affect the market and blockchains, go here.

In Friday’s Money Morning, Harje discusses that when looking at the Australian market, it’s clear that socialist policy has been seeping through unnoticed. The RBA and their regulated monopoly on money supply is the reason you’ve seen the Aussie stock market tumble more than 10% within months. These arguably socialist bankers who effectively guide assets prices as they see fit, have created far too much money for far too little goods and services. As a result, assets prices have climbed far higher than they should. Harje tells readers not to be surprised if the market continues to decline from here on out. To find out more, go here.

Kind regards,

Alana Sumic,
Editor, Money Weekend

PS: In this free report, economy expert reveals four ways you could cash in on the global infrastructure boom. Download now.

Alana Sumic is part of the editorial team here at Money Morning. She contributes to bringing you Money Morning each day, along with all of Port Phillip Publishing’s many other publications.

As the Editor of the weekend edition of Money Morning Alana brings you a summary of the news for the week, and her own take on the week’s most important story in markets. She is also a writer and editor for Port Phillip Publishing’s political publication, The Australian Tribune.

Money Morning Australia