Low rates good news?

Whilst a drop in interest rates is promoted widely as being ‘good news for the housing market,’ with Wayne Swan bouncing around as if he’s a personal ‘Jiminy Cricket’ sitting on the shoulders of the board during RBA’s monthly meetings, the bleak reality remains that for savers, (many of which are ‘would be’ first home buyers,) the news is not good at all.

Since the beginning of May, cuts of between 65 and 75 basis points have been chopped from the ‘big four’s’ base rates for online saving accounts, and for many renters balancing work, rental payments, and other such necessities, the savings account is perhaps the only area capturing the crumbs in which to advance to ownership.

For property shoppers, it may ‘seem’ a welcome relief to secure a little more purchasing power – except of course every other property buyer in the market place also benefits.  The resulting increased competition which predictably eventuates in upward pressure on median prices, is of no benefit to buyer – only to the vendor who – if keeping up with previous repayments, watches their loan diminish faster and equity appreciate.

Investor’s fare a little better - they usually fix rates on interest only terms which at present are extremely favourable, sitting between 5.29-5.69 per cent for 2-5 year terms. Therefore, the recent increase in yields and subsequent tightening of vacancy rates, coupled with the low cost of borrowing and numerous tax incentives, complements a portfolio nicely, making long term investment in bricks and mortar ever more tempting.

So far, we’ve not seen any significant ‘uplift’ in sentiment to signify a call to arms from property investors. A further reduction in the value of investment loans – which for the month of August dropped 0.8 per cent (ABS) – also doesn’t indicate sentiment in this sector is improving - although it’s yet to be seen if more positive data emerges ‘post’ the latest RBA cut in rates.

At the very least, the perception of low rates coupled with the fact that housing affordability is judged to be at its most favourable level since 2003, will force growth in some sectors of the market. The recent release from RPData, citing a national rise of close to 2 per cent over the September quarter in median prices (the strongest quarterly increase since 2010,) seems to underline this.

The RBA is all too conscious of the ‘housing bubble’ risks so often associated with a low interest rate environment. Deputy Governor, Mr Phillip Lowe said the central bank would be watching “very carefully” for resulting signs.  However, the Treasury have not been so prudish in their commentary, stating boldly, they “expect recent interest rate cuts, and the possibility of more, to kick-start the second housing boom in a decade,” It would – they said - be “a natural and desirable development” compensating for any future downturn in the commodity sector.

However, one direct consequence of the previous boom, which locked increasing numbers outside of the housing market, was a national rise of 49.2 per cent in yields over the five year period to 2011 - outpacing growth in home loan repayments for the same period.  Clearly for the venerable ‘homeless’ sector of our community, another housing boom would not be viewed as both ‘natural and desirable.’

Recent data from Australian Property Monitors places the median rent for a house in Sydney at $520 a week (a record for the city) – and in Darwin at a lofty $700 per week. And, whilst property investors look set to reap the benefits, we have a growing rental affordability crisis on our hands.  It’s no wonder, ‘crowded houses’ – with three or more families sharing accommodation, rose nationally by 64 per cent to 48,499, over the past five years.

News this past week that new home construction across the country has hit a 10 year low, has inspired State Government’s to once again busy their hands, devising new grants and incentives for the purchase of ‘new’ property – principally aimed at the first home buyer sector.

However, you only need glance back at the historical lessons associated with the FHOB grants to assess re-introduction, with no analysis of the underlying issues that deter buyers from purchasing new accommodation in ‘grant free’ environments, is poor short term policy.

Following the recent period of inevitable and painful house price ‘correction’ - resulting from the decade long unsustainable ‘boom’ - the ‘08/09’vendors who rushed to purchase using the last round of incentives are still sitting on a pot of negative equity.   The ‘retail sale’ mentality that goes hand in hand with rate cuts and generous FHB grants is easily offset by the hangover eventuating from the realisation that any savings were simply added onto the property’s purchase price and therefore, in retrospect, were not as much as perceived when purchased.

Meanwhile back in the camp of our renters & ‘would be home buyers,’ not only do they have to battle against the prospect of inevitable rising prices, also hampering any ability to save is the stark reality that Australia’s inching its way up in the ‘cost of living’ ranks which further compromises any perceived benefit from ‘rate dropping’ affordability.

A recent survey by Mercer – an organisation claiming to “help clients around the world advance the health, wealth and performance of their most vital asset – their people” paints a rather worrying outlook for struggling savers.

The index - entitled ‘Worldwide cost of Living Survey,’ - covers “214 cities” across “five continents” measuring the comparative cost 200 items including “transport, food, clothing, entertainment” and of course housing.

Australian cities rank high on the list with Sydney moving from number 14 in 2011 to number 11 in 2012 and Melbourne moving from number 21 in 2011 to 15 in 2012.  The full breakdown can be viewed here – with the results making a trip to London look comparatively affordable. No matter what wealth bracket you sit within, I doubt anyone would deny Australia is an expensive place to reside.

Other data highlights the stress low income families experience whilst meeting essential needs of which housing is the main contributor.  The Australian Council of Social Service recently released a national report making the bold and astounding call that one in eight people now live in relative ‘poverty.’

The analysis of the term “poverty” is defined as those having disposable income of less than half that of the median household (the accepted international definition.) This would equal a disposable income of less than $358 per week for a single adult and $752 per week for a couple with two children.

The term poverty is an emotionally fuelled word – it brings up images of third world hunger and refugee camps – conditions we don’t experience here. In addition, a report which suggests such a high proportion of Australian’s live in ‘relative’ poverty is a poor assessment as no matter how wealthy Australia grows, there will always be ‘relative’ poverty.

However, I would challenge anyone to find appropriate accommodation within Australia for a single or dual income family on the income levels cited above. As much as we celebrate the resilience of our housing market with the various economic and employment offshoots, the widening gap between the supply of appropriately located affordable accommodation suited to those in – or just above – the ‘poverty’ line, is huge and shameful.

Private investment does not narrow the gap.  Australian property investors are not in the business of targeting property that can be rented on a dime.  They want quality tenants, market yields and increasing equity. The NRAS (National Rental Affordability Scheme) which was designed to go some way in bridging the affordability gap for low income workers sitting on the rental ladder is also flawed in its design.

The scheme targets institutions willing to fund a large supply of residential accommodation available for rent at 20 per cent below current market rates.  The tax benefits offered over a ten year duration are designed to buffer the short fall in yield.   However, the system is easily manipulated.

Many of the homes set aside for NRAS investors are new properties in outer suburban zones lacking in facilities and home buyer desirability. Even with a reduction of 20 per cent, the rental rates are no cheaper than that of an older home in a similar location.  This is because the rents are assessed 20 per cent below ‘market rates’ which are always somewhat inflated when dealing with property not previously occupied.

When the scheme was first initiated in 2010, the AHURI (Australian Housing and Urban Research Institute) analysed the project to assess the overall impact in easing affordability. The findings revealed only 40 per cent of applicants using the accommodation had fallen below the 30 per cent ‘housing stress benchmark.’ Claims have also come to light suggesting the scheme is being used by developers and selling agents to take advantage of “unsophisticated investors” Quite clearly there’s a need for re-evaluation and improvement to the current legislation and no one should mistakenly believe it’s an answer to an increasing and overwhelming demand for social housing.

All in all, in our current environment of low consumer confidence, high yields, increasing household expenses, and potential upward pressure on house prices - further rate cuts are of no help at all to the most venerable in our community, and certainly not the outright answer to building a healthier economy.

So amidst the shouts of ‘good news’ when/if the RBA cut the cash rate another 25 basis points on cup day – someone cold perhaps consider the savers and renters who don’t have a mortgage, just a reducing pot of money and consequently, future security.

Catherine Cashmore