Elections, RBA & Cash Rates

http://youtu.be/kGKQ6Eo9bHE

Election campaigns are always strange. Once a federal election is called, it literally does leave the country in an indecisive state. For those of us that follow politics, property markets, share markets, local and international news, 2013 has been a rare species. In fact the Election Day that was announced by Prime Minister Rudd being 7th September 2013 is in fact the National Protected Species Day.

When it comes to Prime Minister Rudd during election campaigns, he has a close history with the movement of the official cash rate by the RBA. Before the election campaign in 2007 against former Prime Minister Howard, the RBA decided to put the cash rate up by 25 basis points on 8^th August and a month later Kevin Rudd became the new PM.

The last time the RBA cut rates was 2 months ago on the 7th May. The Australian dollar was US$1.0241 - and here we now are with it below 90c – this has been a great win for the RBA. It is important to note that the RBA has only ever moved the cash rate during an election campaign on 2 occasions; in fact it is the only time the RBA has dropped the official cash rate during an election campaign. This current rate easing cycle has been going now for 18 months (begun on the 2nd Nov 2011) & we have seen 7 cuts totalling -2.00% {from 4.75% to 2.75%}

The previous rate hike cycle saw rates increased by +1.75% over 11 months (from 3.00% to 4.75%) – that followed the previous RBA rate cut cycle, where they cut rates by -4.25% (from 7.25% to 3.00%) over just 8 months.

With the cash rate and the retail lending rates at these unprecedented levels, it actually increases the borrowing capacity for property buyers, first home buyers and in particular property investors. There are 1.8 million property investors in Australia. What that means is that there is no way, no chance at all of any political party making a decision of abolishing negative gearing. It would mean political suicide for either major political party. No political party will make the mistake the Hawke government made in 1985.

In July 1985 the Hawke/Keating government quarantined negative gearing interest expenses (on new transactions), so interest could only be claimed against rental income, not other income. (Any excess could be carried forward for use in later years.)

The result was a considerable dampening of investor enthusiasm; although the new capital gains tax introduced shortly afterwards (September 1985) may have contributed too. After intense lobbying by the property industry, which claimed that the changes to negative gearing had caused investment in rental accommodation to dry up and rents to rise, the government restored the old rules in September 1987, thereby once again permitting the deduction of interest and other rental property costs from other income sources.

When the ALP came to office on the 24th November 2007 the RBA cash rate was 6.75% today it is 2.50%, so in the ALP term we have seen rates drop by -4.25%. It’s also worth noting that the ASX 200 when the ALP came to office was 6330 vs. today 5110, so since the ALP came into power the Australian market has fallen -19%

Over the past few months, in original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments rose slightly to 14.3% in April 2013 from 14.2% in March 2013. However, in real terms, it is the property investors that are out bidding the first home buyers.

Whilst the increased number of property investors in the market place may seem like a social injustice to first home buyers, it is a reality of the current times. There is no doubt about the fact that it is increasingly more difficult to get into the property market for first home buyers, however common sense tells us that it makes perfect sense for property investors to enter the market.

Property investors will always outbid first home buyers because interest repayments are tax deductable. Investors, meaning self funded retirees will also become a part of the property investment market, with the low term deposit rates currently on offer, it should not be a surprise to anybody that property investments are the flavor of the month (and then some)..

First home buyers remain stuck at a 14.9 per cent share of new loans, around half the levels seen during the Federal Government's First Home Buyers' Boost scheme, which lured many into bringing their first purchase forward. The results were particularly weak in New South Wales and Queensland, where there were just 773 and 750 first home buyer loan approvals respectively.

That was the lowest number of first home buyer approvals for either of those states since the Bureau of Statistics started publishing those figures in 1991. When the ALP came to office on the 24th November 2007 the RBA cash rate was 6.75% today it is 2.75% (and maybe 2.50% tomorrow) so in the ALP term we have seen rates drop by -4.00%. It’s also worth noting that the ASX 200 when the ALP came to office was 6330 vs today 5110, so since the ALP came into power the Australian market has fallen -19%.

So, when you analyse the figures outlined, it is clear that people feel more comfortable in investing in property rather than the ASX that is still currently showing a loss of 19% after a 6 year period.