Are We Set For an Extended Period of Low Rates?

Australia could very well be in for a period of ultra-low interest rates, which has the potential to drag on for many years. At least that is what money markets are currently predicting.

The news that the RBA cut rates for the second time in as many months, might be bad news for yield hunters, but it could be very good news for property owners. With interest rates expected to stay low for some time. There is still the belief that the RBA could even cut the cash rate one more time this year, taking it to a record low 0.75%.

However, the fact that money markets are starting to think we’ll be in an environment of low interest rates for the foreseeable future is also telling us a few different stories.

The first of which is that it believes the RBA will not be able to achieve its goal of getting the unemployment rate to fall under 4.5%. As it stands we still have the jobless figure sitting at 5.2% after only some modest improvements last month on the seasonally adjusted data.

This week, Governor Lowe will be speaking in Sydney on the topic of “Inflation Targeting and Economic Welfare”. The assumption is that he will be painting a clearer picture as to why rates are low and staying low and why that is a good thing. As well as where he thinks the employment situation in Australia is headed.

The second takeaway is that it is clear that markets are not convinced the easy monetary policy approach is one that works. We have seen the ECB, FOMC and of course, the BOJ try this approach and to be fair, none of them has been convincing.

The FOMC clearly got ahead of itself in the short-term when Jerome Powell started on the path of ‘normalising’ rates, but since that point, he has had to wind it back quickly. The market is now suggesting that the FOMC will cut US interest rates by 25bp at the July meeting next week.

Again this is simply suggesting that when rates get ultra-low they stay there.

Low Rates Helping Lifting Auction Results

The easy monetary policy is likely to force yield hunters to search far and wide for sources of income and for the most part that is likely to help put a bid under various property markets around the country.

Despite the fact that we’ve seen some weakness on the East Coast in the last 18-months, the numbers are starting to indicate that there is a bit of a turnaround at foot.

Just this week, Sydney’s auction clearance rate hit a staggering 81.5% according to CoreLogic, to the point that some in the real estate industry have been shocked with just how quickly the bounce has come. Melbourne also saw strong auction results, with 70% of those homes listed to go under the hammer selling. The results mark the sixth consecutive weekend that both capitals have held above the 60% level, and the second-straight week that Sydney has been above the 70% mark.

Auction Clearance Rates: Source CoreLogic

The one takeaway that we have to note with the strong auction result is that they have been on low volume. At the moment, we are in the school holiday period, where traditionally we see low volumes being sold and even offered up for sale. So the strong results are an indicator that perhaps there are buyers out there who are keen to act but there is that caveat that needs to be noted.

The suggestion has been made that given the strong buying interest during the typically quiet period, that this bodes well when we turn into the strong selling season in spring. Which is now only weeks away.

Add to that the fact that APRA has eased its borrowing restrictions which allows more people to enter the real estate market with a higher capacity at their disposal. And if they also are under the assumption that we are going to see prolonged periods of low-interest rates, that gives them plenty of incentive to start looking now.

The strong rebound in auction clearance rates coupled with the low-interest-rate environment has led AMP’s Chief Economist Shane Oliver to say prices could be on the rise.

“If you look back at the past cycle, clearance normally leads volumes. If you look at the relationship between rebounding clearance rates and prices, this suggests that within a year or so prices will be up 10% in Sydney and Melbourne,” said Mr.Oliver.

“I think we’ll spend this six month period between now and the end of the year bottoming out and then you might see modest gains coming in through next year.”

If nothing else, the news would suggest that the falls that we have seen on the East Coast will clearly be limited and that there are now some opportunities around for those looking to capitalise on record-low bank lending rates.

The real test looks like it will come in the spring. When more stock starts to come onto the market when we will find out how much buying interest really exists at the moment. The sky-high auction clearance rates might not last into that period, but they don’t have to. When we start seeing those rates hold above even 60%, it is a strong signal that there is enough demand around to hold up prices and even boost them in the next 12-months.

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