Pete Wargent is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and blogger.

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Pete Wargent

9 May 2013

The low interest rate environment is a new era for Australian property: Pete Wargent

Buffett speaks

Warren Buffett has appeared on NBC this week advising investors to shun bonds and look towards equities at the present time. Buffett has warned that the present trend towards near-zero interest rates and the effective ‘printing’ of money in the US (known as quantitative easing) will hurt savers.

It seems hard to imagine how recently we were discussing the Dow Jones index trading around the 7,000 range and yet overnight the Dow burst on to unprecedented highs at above 15,050.

Economic data from the US and globally has not suggested such a dramatic improvement in the outlook, but with more money than ever seeking a home and some kind of reasonable return (which fixed-interest investments are not providing), money has fairly flooded into stocks.

A new era of lower interest rates

This week’s interest rate decision in Australia was to take the cash rate down to a new record low of just 2.75% and this presents Aussies with similar problems. Bond yields are low and savings accounts are not providing much of a worthwhile return either.

The likely consequence will be a flood of money into bank stocks, which pay handsome franked dividend returns, and capital city investment real estate.

And the rate cuts perhaps aren’t done yet. Westpac’s Bill Evans suggested this week that we may yet see three further cuts down to the previously unthinkable cash rate level of just 2.00%.

Property trends

There has been a long debate in Australia about this structural shift to lower inflation and lower interest rates.

Housing bears have been arguing for well over half a decade now that ‘what goes up, must come down’. That is, house prices in Australia had increased as interest rates fell, and therefore prices must revert to the mean and a lower house price to income ratio.

Steve Keen, who predicted a 40% crash, represented one of the more extreme views. To date, at least, he has been completely wrong as was evident from today’s chart pack release from the Reserve Bank.

wargentmay10onethumb

Source: RBA

What those of us of a more optimistic bent have long suggested, is that a shift to low interest rates would likely lead to greater household leverage and higher nominal prices. Although the lower rates could actually see repayments fall comparatively low.

This has been occurring as the cost of capital has fallen, and - even before yesterday's rate cut - repayments on new housing loans for a nationwide median-priced home have fallen close to around only a fifth of household disposable income.

wargentmay10twothumb

Source: RBA

 

 

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