Australian Interest Rates: October Market Update
Australian interest rates remained on hold yesterday amid the frenzy and spectacle of the Melbourne Cup.
The Reserve Bank of Australia Governor Philip Lowe announced the hold in interest rates yesterday and perhaps with good reason as many economists are now pointing to the start of a new economic cycle.
Galloping Property Market
Jacob Greber reported in the Australian Financial Review that a galloping property market in Sydney and Melbourne had forced the Reserve Bank of Australia to shelve any nascent concern about the labour market by keeping the official cash rate on hold for a second month.
Gerber’s comments align with the latest data from Core Logic which indicate Australian home prices rose for a 10th straight month in October as record-low borrowing costs kept demand high.
Core Logic’s index of home prices for the combined capital cities rose 0.5 percent in October.
However a closer look at the data shows what could be describes as a two speed property market with Sydney and Melbourne remaining the hot spots with annual growth at 10.6 percent and 9.1 percent respectively with growth more modest elsewhere, with prices actually falling in Perth and Darwin.
There are other good signs for the Australian economy also, including GDP growth of 3.3 per cent year-on-year in Q2 2016.
Australian Labour Market
One area of concern is the Australian labour market. While the jobless rate fell to a three-year low of 5.6 percent in September 2016, analysts have warned of underemployment with an increase in part-time roles. Australia’s unemployment rate fell to 5.6 per cent even though the economy lost of 9,800 jobs.
The major reason for the fall in the unemployment rate is the participation rate. The fall in unemployment was driven by a drop in the participation rate from 64.7 to 64.5 per cent, meaning the number of people not actively looking for work rose and are no longer counted in the unemployment rate.
With the much talked about transition in the Australian labour market there has also been a transition felt in wages. Wages in Australia have been falling since 2013. On the upside however, wage growth is now heading in a positive direction, indicating that recovery may be beckoning according to a recent article in the Investor Daily.
The article said the HSBC has recently stated, “Higher paid mining jobs have been replaced by lower paid services jobs; as the rebalancing act comes to an end, we expect wages growth and domestic inflation to stabilise,” it said.
The HSBC also increased its GDP growth forecast from 2.8 per cent to 2.9 per cent for both 2016 and 2017, adding a forecast of 3.2 per cent for 2018.
Coal a surprise performer
Another reason the Reserve Bank of Australia decided to keep interest rates on hold was optimism about a stronger US and Chinese economy, plus rising commodity prices.
One of which is the surprising performance of coal throughout 2016.
The world’s most demonised mineral, coal, has seen a price surge thanks largely in part to a change in policy by the Chinese Government.
This is significant for Australia as coal represents approximately 10 per cent of Australia’s exports. Globally, the price of coal has jumped from $US90 a tonne in March to above $US200 as of October 2016.
With this in mind, should the price of coal remain high for the longer term, among other things, this could mean a boost to employment, company revenues, and a reduction in Australia’s trade deficit as well as pushing the Australian Dollar higher.
So what does this ‘hold’ on Australian interest rates mean for home buyers?
It means generally speaking, barring any unexpected and unforeseeable shocks to the economy, we remain in a record low interest rate environment, which makes the costs of paying back a mortgage more affordable.
As a home buyer the most important thing is to do your homework. Get professional financial assistance and seek out a lender who can provide you with a competitive and flexible home loan that can change as your lifestyle and the economy changes into the future.