Forget one big rate cut; expect two or three smaller ones

Even the dogs are barking that the Reserve Bank board is almost certain to cut the official interest rate in two weeks. But those expecting a cut of 50 basis points are barking up the wrong tree.

You have to ask if Reserve governor Glenn Stevens looks like a 50-basis-point kind of guy. Is he the kind of guy who would go for the grand gesture? The kind who’d panic?

Or is he the kind who definitely would not panic; who would keep his cool and act in a quiet, confident, carefully measured way?

He looks like a 25-basis-point kind of guy to me. Speak softly and carry a big stick. And we do know he is the kind who would move the rate by 25 points two months in a row.

What’s more, if the object of the exercise were to make a big impression on consumers and business people — and what central bankers call the “announcement effect” is an important element when you are trying to influence psychology and change behaviour — it’s not at all clear that one 50 beats two 25s in quick succession.

If you have been alive for a while, you know that central banks rarely move rates just once when the time comes to change direction. If 25 points were all you thought you needed to do, you wouldn’t bother.

So we can expect two or three rate cuts before the end of the year. But, at this stage of the game, a total cut of between 0.5 and 1 percentage point is all we should expect.

Remember that, although deputy governor Ric Battellino was right to remind us last week that the Reserve cannot wait for a fall in inflation before it starts cutting rates because it has to act pre-emptively, we still have an inflation problem and downward pressure on inflation needs to be maintained.

In other words, while the sharpness of the slowdown in demand this year has been enough to induce the Reserve to ease tightness, it will want policy to remain reasonably tight until the evidence that the inflation rate is moving into the target zone is clearer.

Of course, implicit in this approach is the Reserve’s judgement that the economy is far from falling in a heap. Should demand continue slowing sharply, that would be a different matter.

Moving to the next big question — will the banks pass on all the cut in the official rate? — Battellino was also right in reminding us that what the Reserve ultimately cares about is the level of the banks’ lending rates, not the level of its official rate.

This is a no-brainer. It is the interest rates actually paid by businesses and households that affect demand. The official rate’s only role is to affect banks’ lending rates.

So, should a cut in the official rate fail to bring about the desired fall in bank lending rates, the Reserve’s obvious response would be to keep cutting the official rate until it did.

This reminder could be seen as letting the banks off the hook. Feel free to keep fattening your interest margin, chaps, we’ll accommodate you by making further cuts in our official rate as required.

But the banks would be unwise to see this as a green light. The Reserve would not feel comfortable facilitating uncompetitive behaviour on the part of the banks.

The Reserve keeps a close eye on bank margins. When the global credit crisis forced up the banks’ borrowing costs, and they first began making their “unofficial” increases in mortgage rates, Stevens was willing to defend them against public criticism.

But the Reserve will offer no support this time — as was clear from the observation last week of an assistant governor, Philip Lowe, that there was “no obvious reason” for the banks not to pass on a cut in the official rate.

So, should the banks fail to pass the rate cuts through in full, they can expect no sympathy. They will be roundly condemned by both sides of politics, the media and every talkback jock in the business.

The banks and their chiefs are certainly greedy enough and heedless of customers’ interests, but I doubt those at the top are that stupid.

 

Sunshine Coast property market set to pick up

Talk of an interest-rate cut has seen property watchers and investors perk up, resulting in a resurgence of interest from buyers.

Ray White’s Brett Graham said in the past four weeks there had been a lift in the amount of inquiries, numbers at on-site auctions and, more particularly, sales.

“This is more the result of sellers understanding the market and what it takes to sell today,” he said.

“The buyers are sensing and seeking out the serious sellers and as a result they are prepared to buy.”

Mike Burns at Elders Palmwoods said buyers looking to the hinterland had more options now than they had had for some time.

“When the market was running hot last year, buyers had to take what was on offer,” he said.

“Now there are better options to compare what’s available (and) there are plenty of buyers responding to value.”

The positive economic outlook could be expected to bring with it more positives for sellers too, according to RP Data Research director Tim Lawless.

“On the Sunshine Coast I think we’ll start to see more buyers and greater levels of investment over the coming months because over the last nine months investment levels have been exceptionally low: there just hasn’t been enough buyers in the marketplace,” he said.

Mr Lawless said he expected median price growth on houses on the Coast to achieve returns between five and 10% in 2009 after a slight decline in median values in the first half of 2008.

“A great deal of opportunity is going to be at the southern ends of the Coast because it offers affordable housing in addition to being relatively close to Brisbane because some people are choosing to commute between the two,” he said.

The northern, more affluent market, was also expected to perform well, he said.

Quick turnaround

So much can happen in such a little time … it was only late last month we were being told interest rates might not drop until 2009.

This week, however, Reserve Bank of Australia deputy governor Ric Battellino gave a strong indication the official cash rate might fall by at least 25 basis points, from 7.25%, next month.

And the Sunshine Coast property market has responded quickly.

Property Week editor Erle Levey said: “In the 28 years since the Sunshine Coast Daily was launched, we have seen the property market go through booms and busts.

“There has been a marked change from the bleak days of June. The sunshine of the past two weeks has also brought the buyers out.

“When you couple interest rate reductions with the abolition of stamp duty for first home buyers for properties under $500,000 next month … that is bound to have an impact.’’

The changes will save buyers $8750 on a $500,000 home, after September 1.

 

Past years median sales prices for each area

                   

                                                                                                        

Buderim	$513,750	+ 36.8%
Maroochydore	$465,791	+ 40.0%
Maroochy River	$532,612	+ 45.7%
Bli Bli	$395,033	+ 41.4%
Tewantin	$448,958	+ 36.3%
Noosa	$806,366	+ 44.4%
Wurtulla	$473,000	+ 40.3%
Eumundi	$575,041	+ 55.5%
Cooroy	$451,312	+ 44.9%
Little Mountain	$448,660	+ 44.9%
Nambour	$347,562	+ 60.6%
Coolum Beach	$497,645	+ 39.0%
Caloundra	$524,416	+ 34.1%
Mountain Creek	$471,437	+ 33.3%
Peregian Springs	$562,937	+ 43.6%
Yandina	$393,833	+ 55.6%
Mooloolaba	$589,500	+ 53.8%
Palmwoods	$459,541	+ 57.4%
Tanawha	$856,958	+ 60.7%
Woombye	$410,520	+ 45.9%
Mooloolah Valley	$440,736	+ 51.2%
Landsborough	$377,291	+ 54.3%
Buddina	$622,708	+ 54.5%
Bokarina	$657,312	+ 41.7%
Warana	$492,462	+ 40.8%
Dicky Beach	$756,916	+ 60.9%
Pacific Paradise	$375,017	+ 39.7%
Mudjimba	$577,375	+ 23.8%
Marcoola	$488,895	+ 36.0%
Sippy Downs	$416,645	+ 37.7%

 

 

 

 

 

 

 

 

 

Black beauty

Who would have thought a whale needed to know left from right?

Guests on board Australia Zoo Whale Encounters vessel Steve’s Whale One were treated to a surprise visit by a black whale off Mooloolaba yesterday.

The all-black humpback was frolicking with other whales along the Sunshine Coast and put on a great show for the lucky whale watchers.

 

Skipper Allan “Shorty” Short was excited by the rare sighting, having never seen a black whale in his 16 years of whale watching.

“We were treated to an awesome display from an all-black humpback whale, which is rare on the east coast of Australia,” Shorty said.

“These darker whales usually form the Northern Hemisphere migration and head up the west coast, but each year we do get the odd one that will take a right instead of a left and head up the east coast.”

 

Shorty identified the whale as being different to a black whale recently spotted off the Gold Coast. He said the whale spotted yesterday was darker and more active.

“It was very active, going off right beside the boat for about an hour. It looks like it is fitting in well and having a great time.”

Reserve may cut rates, banks might not follow

·         It’s the same all over the world, here is another article:

Westpac’s new chief executive, Gail Kelly, the ANZ’s mortgage chief, Michael Rowland, and BankWest’s head of retail banking, Ian Corfield, said yesterday that any reduction in home lending charges would depend on market conditions.

Their comments came after Prime Minister Kevin Rudd encouraged Australians to switch banks if theirs did not pass on interest rate cuts that the Reserve is expected to announce.

A growing number of economists predict the Reserve may reduce interest rates starting next month, with up to 0.5 percentage points cut before year’s end. The Reserve indicated this week that it felt it had choked off the rise in inflation, leaving scope for lower rates.

Signs that market conditions have eased a little emerged yesterday afternoon, when ANZ announced its fixed-term mortgage rates would fall by up to 0.5 percentage points from Monday. Its one-year fixed rate will fall by 11 basis points to 8.99% and the seven-year rate by 50 basis points to 9.39%.

At a parliamentary inquiry earlier yesterday, ANZ did not guarantee it would completely pass on any potential cut in rates by the Reserve. Like Westpac and BankWest, its stance suggests it is resisting pressure from the Federal Government.

Mr Rudd said yesterday his Government had introduced changes making it much easier for consumers to switch accounts if they were unhappy.

“If the banks are not going to do the right thing, we’re trying to make it possible for consumers to vote with their feet,” Mr Rudd said. “I say to the commercial banks in Australia that they have a responsibility to ensure that action by the Reserve Bank is reflected in the interest rate posture adopted by these commercial banks.”

Asked yesterday if she had had any direct conversation with the Government on rates, Ms Kelly said that while there was frequent communication with the Government, there had been “no particular conversation over recent times”.

Speaking at a briefing to banking analysts and media on Westpac’s profit outlook, Ms Kelly said she would “love to” pass on any rate cut, but that the extent of such a cut would be balanced between the competing effects of how much it was costing the bank itself to borrow the money to lend, what its competitors were doing, and the effect on customers.

“Clearly, we would love to pass through the full 25 basis point drop if that were to occur … but we’ll need to factor in all of those issues at that time.”

In the past year, as the Reserve raised rates, the banks passed on the full amount of each increase — and in most cases an additional amount to compensate for the higher cost to them of borrowing the money in a global marketplace that has been rocked by the collapse in mortgage-related securities in the US.

Banks have argued that they never fully passed on the increased cost of borrowing, which means their profits have shrunk, and there is an expectation they will be slow to give back any cut in rates to customers in a bid to improve their profitability for shareholders.

Speaking in Melbourne at the parliamentary inquiry into banking competition, the ANZ’s Mr Rowland said the bank would like to cut interest rates “as quickly as possible” but would first have to assess funding costs.

“The strongest indication I can give you is that we want to pass on an interest rate cut, if funding costs allow. I can’t be any clearer than that. At the end of the day, we’re a commercial organisation,” he told the inquiry.

He likened a Reserve cut to a drop in the price of an ingredient in the overall cost of baking bread. “The cost of baking a loaf of bread has gone up, we haven’t passed that fully on to our customers, the extent to which reduction in a portion of the ingredients of that loaf of bread dropping — yes, we would like to pass that on — but that doesn’t necessarily mean we can reduce the total loaf by the amount of a reduction of a part of that.”

BankWest’s Mr Corfield expressed similar sentiments.

“We have to make those funding decisions based on the blend that we have got in the book at the time,” he told the inquiry.

Also at the hearing yesterday, Mr Rowland said the four major banks’ share of the mortgage market had increased over the past six months as a small number of non-bank lenders were squeezed out by higher costs. But he said he expected the non-bank lenders to return when conditions improved.

 

Construction prices set to increase as steel prices soar

Consumers should expect to pay more to build their own homes as price spikes in building materials continue to drive up the cost of building, according to the Master Builders Association of NSW (MBA NSW), which revealed that the volatility of the global price of steel over the last six months will continue throughout 2008.

“The jump in the price of steel and concrete is adding further pressure to housing affordability and exacerbating problems in rental markets that are already stretched to the limit. These price increases will also significantly impact on the recovery of the Australian housing market,” said Brian Seidler, executive director of MBA NSW.

“Hikes in transport costs because of rising oil prices are also adding to these pressures.”

Seidler added that it’s been “clear for some time that Australia is facing a housing affordability crisis”, and that everyone has a different perspective on what can be done to address the critical shortfall in housing.

“Increasing the supply of affordable homes is one part of the solution, but the soaring price of steel and other building materials adds another challenge to the delivery of affordable homes,” he said.

“Reinforcement steel prices have shot up by more than 60% in six months and it appears that there’ll be more increases to come.”

Builders are being quoted increases for reinforcement steel of around $700 per tonne, according to Seidler, which means that the three to five tonnes of reinforcement steel required to build an average single storey, three-bedroom house will cost $2,000 -$3,500 more now than it did six months ago.

“This doesn’t even take into account the cost of other materials like plastics and concrete, which are on the rise as a direct result of increasing oil prices. We also need to consider the impact of the skills crisis, which also contributes to the cost of building a home,” Seidler said.

The housing industry is “officially in the doldrums”, he said, and the rapidly escalating cost of building products is going to “seriously impact any chance of a speedy recovery”.

According to leading steel supplier OneSteel, price volatility in the market will continue throughout 2008. The price increases are linked to the global dynamics of the steel industry, including steel-producing countries such as China and Taiwan rolling back exports to help address domestic demand.

 

Migrants push up house prices

Here is a recent article from the Courier Mail Newspaper:

The Federal Government has admitted that battlers could be squeezed out of the housing market by tens of thousands of new skilled immigrants.

A Senate budget estimates hearing has been told the extra 31,000 permanent skilled migrants will compete with local people for a place to live.

But Immigration Minister Chris Evans played down the issue, saying more skilled migrants would boost the nation’s low housing stocks in the long run.

The revelation is bad news for many Australians who have been squeezed out of housing and rental markets by rising costs and a shortage of properties.

In the lead-up to last year’s election, Prime Minister Kevin Rudd campaigned on delivering more affordable housing.

Migration deputy secretary Peter Hughes said increasing the permanent skilled migration program - which will stand at 133,500 in the next financial year - would reduce inflationary pressures and cut the cost of housing.

But the answer was not good enough for NSW Senator Marise Payne, who asked: “Where are they going to live? We are under building by 30,000 dwellings a year already in this country.”

Senator Evans replied: “They are going to live in the same places that the million people who came in under your government are going to live.

“They may have well made a contribution to the current housing crisis and you’re right to express interest in the public policy issues in how next year’s intake will impact on the problem.”

He said he had spoken within his ministerial counterparts about the problem.

“(Affordable housing is generally) a real problem (and) it’s one of the reasons why housing has been a key focus for this Government,” he said.

“There are huge pressures on housing in this country and one of the things I’m looking to respond to is the Housing Industry Association’s call for the fact they can’t get building tradesmen.

“And one of the things I’ve been pressing the department on is us trying to be responsive in this year’s program.

“For the need to find construction workers and bricklayers, carpenters etc, and make the program meet these shortages in Australia.”

Mr Hughes also downplayed the pressure it would have on the already-stretched market, but said all immigration over the years had impacted on housing. “Newcomers to the country obviously draw on the housing and accommodation stock,” he said.

 

Government back flip stuns anti-development forum

No Sunshine Coast development would be allowed to go ahead unless infrastructure was in place to support it.

That was what a state government spokesman told a stunned meeting of about 140 people at the Lake Kawana Community Centre last night.

The forum, called No Development Without Infrastructure, had been organised by the state opposition to ensure plans by the state government to fast-track new Coast home projects would have appropriate infrastructure.

“The government wants to fast-track growth and bring 75,000 more people to the Coast but has made no commitment to fast-tracking infrastructure to support that growth,” forum organiser and Kawana Liberal MP Steve Dickson said.

But parliamentary secretary Stirling Hinchcliffe, representing premier Anna Bligh, derailed the attack in his opening statement.

“The state government has specifically stated that (apportioned) areas must be developed with appropriate infrastructure – or they cannot go ahead,” he said.

Last night’s forum was organised in part to showcase new LNP leader Lawrence Springborg. Mr Springborg said the Coast had become a victim of its own success, having to cope with the needs of its population and a large day-trip “lifestyle” demographic.

 

Boon for those wanting to buy on Sunshine Coast

A cut in interest rates and a softer property market could prove the perfect combination for buyers looking to snap up a piece of paradise on the Sunshine Coast.

Industry experts predicted yesterday that interest rates could fall, after retail sales figures showed a drop of 1% in June – the largest amount in six years and the fourth time in 2008 that the monthly figure has been weak. At the same time, house values in Brisbane have dropped 1.3% in the June quarter, and units fell by 3%.

Coast agents contacted by the Daily yesterday said while the Coast was not immune from the slowdown, there were still plenty of buyers around because of the desirability of the region as a place to live.

Remax Noosa principal David Garwood said prices had dropped slightly, which meant property was selling for less than it had last year.

He said vendors could still make a tidy profit.

Mr Garwood said the best buys were at the lower end of the market as owners came to grips with higher interest rates.

“There are good buying opportunities,” he said. “There are people who need to get a result and they’ll meet the market.

“If you bought three or five years ago, there’s nothing wrong with selling; you’re still way ahead.”

Ray White Mooloolaba partner Kevin Annetts had not seen a downturn in prices but agreed it was a good time to buy.

“Our inquiries are still strong, our open for inspections still seem strong and there’s still a lot of supply,” he said.

Henzells Agency general manager Peter Ford agreed there was strong investment interest for Coast properties.

Mr Ford said it was a great time for buyers, and sellers could benefit from the ready supply of interested people.

He said that when the market slowed on the Coast it did not necessarily mean prices went backwards.

 

Residential listings down on 12 month average

Just over 13,000 new residential properties are being added to the Australian mainland market each week, which is below the twelve month average of 14,400 new listings each week.

In fact, new residential listings have been tracking below the twelve month average since the week beginning May 5th 2008, demonstrating that there has not been a wholesale dumping of housing stock into the market as many people feared may happen.

Rather, potential vendors are preferring to hold stock off the market until selling conditions improve. Total stock levels are now 11 percent lower than they were two months ago, suggesting market supply and demand is moving a bit close to balance.