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Oasis Property: Sydney Buyers Agents

2007/08 Interest Rate Outlook:

 

MAY 2007

The speculation on interest rates over the past few months has been inconsistent at best. It is important to note raw data with trends to give some signals to where we might be headed. The important point is not to focus on when an interest rate rise will hit us, just that it will (eventually), and its impact is also contingent on many other factors.

Current Rate:

The RBA decided to leave the cash rate on hold at 6.25% in May. As the March rate remained unchanged against much media opinion, April & May justified this stance by the RBA by acting upon Quarterly (Jan-Mar) inflation figures sittign in the RBA's comfort range of under 3%.

Impact

Mortgage Choice and REI data suggest that Australian borrowers maintained their preference for fixed rate loans in the past few years. With 32% of all approvals in the fixed rate category, this has climbed from 30%, representing the 12 month average. The Mortgage Choice Consumer Sentiment Survey results released also revealed that 86.3% of respondants nationally believed that interest rates would rise in the first quarter of 2007. With the benefit of hindsight suggesting that we were worrying about nothing, the above statistic (fixed rate loan rates) does suggest how we react to speculation and the trend of upwards interest rates movement.

With rising petrol costs being on most home owners mind, the possibility of interest rates rises may be an item that Australians have combatted for the past 2 years, staved off with increased wages and a good economy, and are programming to be a case of 'managing' the damage through fixing rates to mitigate their losses.

Analysis . Have rates peaked?

The RBA has given very clear signs that combatting inflation is still high on its agenda and hiking rates are a very high possibility.

"All available data suggest high capacity utilization, a tight labour market and strong demand growth. Based on these trends, inflation is forecast to return to the top half of the target during 2008," reports RBA spokesperson. To this "underlying inflation is expected to rise to about 2.75 percent in 2008 and 2009, with headline CPI inflation following a similar path."

HSBC Australia (chief economist) John Edwards and Westpac Banking Corp (chief economist) Bill Evans support that the RBA's forecast of higher inflation in 2008 was a clear signal that it has not relaxed its tightening bias.

He (Bill Evans) said the recent lull in inflation pressures would prove temporary as stable monetary policy and a substantial fiscal stimulus expected in next Tuesday's federal budget would only accelerate economic momentum. That brings us to........

Federal Budget

Look closely at Tuesdays (8th May '07) Federal Budget windfall ($16B) and see how the money is dispersed. We might be surprised to see Mr Costello not handing out tax breaks that might otherwise filter into inflationary pressures as the year progresses. This will be his challenge.

Longer Term Forecasting

"Eventually the stresses on limited capacity will signal that higher rates are required," says Bill Evans (Westpac)

He suggests that Westpac's forecast is for two 25 basis points rate hikes in February and May 2008. This would extend the current tightening cycle to six years and 250 basis points.

What this means for the property market

Like the property market, the interest rate cycle has its own direction based on fiscal policy and the ecent economic habits of the country, both in the domestic and commercial markets. The property market, while governed by market sentiment and affordability, seems to have fallen over in recent years due to the decline in both factors. In these times, with improving yields and market sentiment returning, property investors would at least be diligent to see where might put their money to best use.

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