Interest rates have been a hot topic this year. Of course they’re always on the agenda of finance media commentary, given their use as a litmus test for the overall economic viability of our nation at any given time.
But across these markedly different last 15 months, where the Reserve Bank has sat politely on an all time low 2.50% cash rate, you virtually trip over a new opinion piece about what’s happening and where rates are heading every time you open your email (I say ironically) or read a newspaper (they still exist I’m told).
I don’t think this has happened by chance either. I think it’s got a lot to do with two things:
1. There are now many more micro and macro fundamentals in a state of significant transition within our increasingly connected global economy. Superpowers are shifting and economies are changing considerably as a result.
It’s become nigh on impossible to work out exactly what’s going on within the world’s political circles and in turn, much more difficult to get a handle on the future fiscal fate of any country really.
Fundamentals are now very much influenced by increasing political interplay and policy, which generally changes with every new elected government, and it’s not just on a local level, but a global one.
2. The media mechanisms have a lot more muscle. If you want people to talk about something to do with economic markets, publish it as a news headline with hyped up commentary and scary rhetoric.
We’ve seen a lot of ‘fluff’ about our property and finance sectors over 2014 and much of it has been intended to do one of two things – a) increase the current higher levels of demand and activity or b) slow it down…depending on which side of the fence you stand.
It’s not just some of the messages that are muddying the waters for all the statistical seers gazing into their crystal balls either, but the sheer volume of news we’re inundated with in the 21st century.
Social media, along with digital and print media, has made the delivery of news almost immediate. This precipitous media shift became very apparent when most of the world watched as America’s World Trade Centre buildings collapsed on live television back in 2001.
Today’s rapid-fire delivery of news is increasingly fuelling market sentiment; causing shorter cycles for the share and housing sectors in Australia, as well as most other developed and developing nations.
Rhetoric or Regulatory rough housing?
Demonstrating the increasing power of media influence, industry regulators APRA and the RBA started talking up the introduction of macroprudential policy around the middle of the year.
They introduced the idea of tightening regulations around ‘riskier’ lending in the wake of a significant increase in the number of investors flooding certain pockets of the property markets – particularly around Sydney – and causing values to skyrocket in the wake of increased competition for limited stock.
Some suggested this was a tactic intended to put the brakes on all the excitement, in light of a continuing quandary for the RBA…either raise rates and risk stalling the Australian economy entirely (with already weak consumer and business confidence), or sit on them to stimulate the economy, while cashed up investors swoop down on a more affordable (due to the lower cost of mortgages) property market.
Interestingly, market activity did in fact ease slightly at the prospect of investor loan policies becoming more tightly controlled. But was it enough for APRA and the RBA to back off?
Well if last week’s announcement is any indication, it seems the monetary policy Gods might be coming to terms with having to sustain the current lower cash rate environment into 2015, but still feel the need to force a slowdown in the property sector.
Investor loans under scrutiny
The Australian Prudential Regulation Authority and Australian Securities and Investment Commission have now joined forces to impose elevated “supervisory intensity” on the rapid growth in loans to investors and related forms of ‘higher risk’ lending by banks, over coming months.
Lenders deemed to be taking ‘undue risks’ could be hit with a lift in their target minimum capital ratio by APRA, with some of the ‘red flags’ including a growth in investor loans of more than 10 per cent and a large volume of higher loan to value ratios.
ASIC also advised it would conduct ‘surveillance’ into the provision of interest only loans, “as part of a broader review by regulators into home-lending standards.” This came off the back of data that revealed IO loans, as a percentage of new housing loan approvals by banks, reached a high of 42.5 per cent in the September 2014 quarter.
APRA also made it clear that they’re keeping an eye on the rising trend of owner-occupiers being offered IO loan products by lenders, concerned that this is a reflection of people not being able to service increasingly large mortgages.
This action is a direct response to “strong house price growth in Sydney and Melbourne.” With the Council of Financial Regulators, APRA the RBA, ASIC and the Treasury demonstrating a united front in “working together to monitor, assess and respond to risks in the housing market.”
However the regulators still seem to be talking things up, rather than taking any real assertive action for now.
What about interest rates?
The reason I spent so much of this piece explaining the evolution of influential interest rate and market fundamentals is to demonstrate how difficult it is to gaze into the future and make any type of accurate forecast. But it’s still interesting to see what industry insiders are placing their bets on for 2015 – ups, downs or otherwise.
So here’s a quick snapshot of rate movement predictions as we farewell what will be remembered as an interesting and eventful 2014 in the annals of Australian residential real estate.
The banks – Some of the Big 4 have done an about face in the wake of a weakening Aussie dollar. NAB’s gloomy business sentiment survey results from the beginning of December, with a drop in confidence of four points and its lowest position since mid-2013, caused it to predict two 25 basis point cuts in 2015.
The NAB said a further drop was 30 per cent likely; otherwise things would remain unchanged until late 2016. Westpac agrees rates will drop further, with their decision motivated by weaker than anticipated GDP figures for the beginning of December.
The economists – 32 economic analysts were surveyed by Bloomberg, with the majority all concurring that while a steep percentage point increase is unlikely, the chance of the cash rate rising by at least one per cent was pretty high.
Speaking to SmartCompany, CommSec economist Savanth Sebastian suggested, “The economic environment is still very patchy…rates won’t go back to super aggressive levels anytime soon.”
But he added that because forward indicators are improving, some movement toward the end of 2015 is expected; “We will see steady increases next year…even if everything goes right it’s unlikely they’ll raise by that much. It would create pain in the economy, especially for first home buyers who have taken out loans with wage growth being at the second lowest rate on record.”
Sebastian and industry colleague, JP Morgan chief economist Stephen Walters, are both backing a 1 per cent cash rate increase over the course of next year.
In our ever expanding backyard, where so many fiscal fibers are weaving an ever more intricate web of influence over our economic prosperity as a nation, it’s difficult to know what might happen in two months, let alone 12. But I would be very surprised if interest rate movements will be bearish enough in 2015 to make much of a difference to your bottom line as a property investor…and I’d lay odds on that.
– Ed Nixon