Interest Rates Looking Forward
Posted on 03. Jun, 2010 by Chris Lang in Commercial Property, Economic Issues, Interest Rates, Investment Objectives, Residential vs Commercial, Retail Sector, Using Debt, Your Exposure
... and Commercial Property
This week's decision by the RBA to leave the cash rate on hold was an easy one — mainly because the major banks had basically helped it out, by increasing their rates earlier by a greater margin.
The RBA's view was that the current rate of 4.5% was "appropriate for the near term".
And this series of charts may help you with some of the background, against which they reached their decision.
But looking forward, you would expect the RBA to continue to leave the cash rate where it is — at least until August this year.
And the Financial Review neatly summarised the arguments for and against in this little table.
The Effect on Property
Clearly, the recent rate rises have had an effect upon the Residential property market.
But you need to keep in mind that you have been regularly seeing Auction clearance rates at between 80% and 90% each weekend. And therefore, when they dropped to between 70% and 75% ... it was suddenly shock and horror.
The reality is that an Auction clearance rate of around 60% means the market is actually "in balance". Anything higher than that is putting pressure on prices.
The greater concern is with the large number of first-time buyers, who may find themselves over-committed to huge mortgages and escalating monthly payments.
As we've discussed in earlier postings, rising rates will in turn have an effect upon Retail property — although the latest turnover figures would suggest that this sector is holding up far better than expected.
And you'll recall the BIS Shrapnel study (conducted over some 80 years) confirmed that there is no correlation between rising interest rates and the Commercial Office market.
Instead, this is strictly driven by Demand and Supply.
Accordingly, Investor appeal for the foreseeable future would rank the various Capital City Office markets in the following order ...
- Melbourne
- Adelaide
- Sydney
- Perth
- Brisbane
As the economy continues to improve, vacancy rates will fall around Australia.
As such, you'll start to see rapid rent escalations for Melbourne and Adelaide; and a gradual pickup in the absorption of the current oversupply in Sydney, Perth and Brisbane.
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