FIRST-home buyers are flooding into the market thanks to falling interest rates and slumping home prices.
But investors are shunning cheaper homes because they fear prices could fall further.
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Today’s cut will save a mortgagee with a typical 30-year, $300,000 home loan about $170 in monthly repayments if the lender passes on the full amount. Over the life of the loan, the savings will total about $61,272.
”There was a significant deterioration in world economic conditions late in 2008,” said RBA Governor Glenn Stevens in a statement accompanying the cut. ”The effects on household and business confidence of the financial turmoil following Lehman’s collapse, and continuing strains on major financial institutions, saw a significant downturn in demand around the world.”
The RBA has now lopped four full percentage points off its cash rate since it changed tack and began cutting rates last September. The cash rate has not been this low since 1960, according to Bloomberg data.
The rate reduction comes hours after the Federal Government announced a $42 billion stimulus plan aimed at keeping the economy out of a recession. The spending includes some $12.7 billion in cash payments and $28 billion on new infrastructure projects including roads and schools.
“What they have done is certainly enough, put together with the fiscal package,” said Michael Blythe, chief economist for the Commonwealth Bank. ”Policy setting in Australia is very stimulative, although we are quite likely to see rates lower” in the first half of 2009.”
Double boost
The central bank said it had taken into account the additional government spending.
”The combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad,” the RBA said in its statement.
Today’s RBA cut matched market expectations.
The Australian dollar initially jumped, rising from 63.5 US cents to 64 US cents after the RBA move. The benchmark ASX200 share index was recently 1.2% up for the day, easing from 1.4% higher shortly before the RBA release.
More cuts to come
The fact the RBA assessed the likely impact of today’s stimulus package indicates the bank may have been considering a bigger cut, said JP Morgan economist Helen Kevans.
Ms Kevan expects another 50 basis point cut when the RBA board next meets in March to complete the central bank’s current easing cycle.
Today’s RBA’s rate cut follows the Federal Government’s revision of growth forecasts for the economy. The Rudd Government expects Australia’s growth to slow to 1% this fiscal year to 0.75% next year - one of the few economies to continue to expand.
The RBA said Australia remains relatively strong.
”Australia’s financial system remains in a strong condition and large interest rate reductions over recent months have been passed through in substantial measure to end borrowers,” the RBA’s Stevens said.
”Nonetheless, the combination of last year’s financial turmoil, a severe global downturn and substantial falls in commodity prices has had a significant dampening effect on confidence, and therefore on prospects for growth in demand.”
The Reserve Bank indicated it had more scope for cutting rates as inflation eases.
”Inflation has begun to moderate and, given recent developments, it is likely to continue to decline,” the RBA’s statement said.
Consumer prices fell by 0.3% in the December quarter, its first reduction since 1997, according to statistics released last week.
Three-year bond futures fell 0.085 points to 97.035, while 10-year bond futures shed 0.045 points to 95.870.
Despite everything, Australians do buy in Bali -attracted to the beauty, lifestyle and people.
The holidays are well and truly over. Surely, everyone will be back at work on Monday . . . if they’ve still got a job. With the financial situation so grim, many people will wish they could move to a tropical island to see out the rest of the year.
What about Bali? OK, so there’s been the Schapelle Corby and Bali Nine dramas, terrorist attacks, executions, threats of reprisals, security warnings, rapes and murders, even a rabies scare and a booze shortage recently but Australians do buy property there.
“There’s a whole heap of Australians,” says Charles, a Sydney caterer who bought land in Bali several years ago and intends to build a villa.
“I just fell in love with the island, the people, the scenery and the fact it offers such a relaxed lifestyle . . . and no one’s going to deny having cheap household help can swing the deal.”
This opportunity to live in the lap of luxury, complete with staff, at a relatively affordable price has transformed the Bali tourism market in the past decade - particularly around Seminyak, a haven for upmarket restaurants.
Some love it so much, they want to own a place in Bali for holidays, to rent out and eventually live in. Despite the 2002 and 2005 bombings, by last September, when Domain visited, agents said buyers were more concerned about movements in the dollar than terrorism.
Phone calls this week, though, revealed the financial crisis has had an impact and some luxury villas have had price drops of 30 per cent.
“We have a number of foreign owners who have lost money in the stockmarket and they need liquidity,” says Mike Pugh of Exotiq Real Estate in Seminyak.
Last year, when the Australian dollar was strong, nearly half his sales were to Australians.
“Especially when it went above 90 [cents to the US dollar] we had a mad rush of people coming to buy,” he says. (This week, it was 66 cents.)
Even now, some of the villas - especially with the price drops - look appealing. Particularly if you’re still employed or have a healthy redundancy cheque. Most of the foreign buyers in Bali are so rich they don’t need to borrow from a bank, which is fortunate since it’s impossible to get a loan either within Indonesia (unless they marry a local) or at home. There are also restrictions for foreigners buying freehold, though they can easily buy leasehold. Many keep quiet about their purchases for tax reasons.
“Bali is a cash market and there are no subprime mortgage meltdowns here and there are no bankruptcies or foreclosures, the only problems are that some of the developers have got their initial funding from foreign banks, which is proving difficult for some,” Pugh says.
Mira Sawitz of Jones Lang LaSalle says the financial crisis has had an impact.
“Inquiry is slowing down and clients who were hot prospects have decided to postpone their decision to buy anything,” she says.
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