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10 December 2008

A message from Tony Hoffman CA | Director of Hoffman Kelly | Chartered Accountants & Business Advisors

Source Wetspac Bank:

Interest Rates

The RBA cut the overnight cash rate by a further 100bps at its December meeting to complete the most aggressive three month rate cut cycle we have seen since the Bank started announcing target cash rate levels in 1990. Even in 1990 when the starting point was 15% and the unemployment rate had jumped from 5.5% to 7% it still took eight months to get to 12%; another eleven months to get to 8.5%; and a further eight months to get to 5.75% where the policy stance was finally stimulatory.

Our forecast has been for rates to bottom out at 3.5% in March. That would have entailed a 50bp cut in February followed by a final 25bp cut in March. That profile now looks too conservative. We have lowered our global growth forecast in 2009 to 1.3% indicating that the world economy is now deeply in recession. Australia’s stimulatory policies will need to extend into the June quarter. That suggests a further ‘leg’ down in rates to 2.75% through the June quarter. With central banks in the G3 now flirting with zero rates, such a low point for Australia’s rates seems eminently sensible.

The issues are clear

The Bank is seeking to get ahead of the curve on this occasion in an attempt to provide sufficient stimulus to incomes and confidence to avoid a disastrous collapse in demand that would inevitably lead to a severe contraction in employment and house prices. Monetary policy is being complemented by fiscal policy in this coordinated policy effort. The fiscal surplus is now forecast to fall from $19.7bn in 2007-08 to $1.8bn in 2008-09 – a fiscal stimulus of 1.7% of GDP, easily the largest since the 2.8% of GDP fiscal expansion in 1991–92 when the government fiscal position moved into deep deficit.

The outlook for employment.

The Australian labour market has slowed through 2008 but with only a slight up-drift in unemployment. The slowdown in domestic demand and rapid deterioration in business confidence will weigh more heavily on jobs growth in 2009 but at this stage our preferred lead indicators still suggest flat jobs growth rather than a contraction. As such, we expect the unemployment rate to rise from 4.5% in 2008 to 5.7% by end 2009 and over 6% in 2010. Note that this is not the surging unemployment rate typical of recessions. It indicates stalled hiring and job losses in some sectors but not widespread labour shedding. Weak real wages growth is also supportive. However, risks are clearly tilted to the downside.

Household debt servicing ratios and house prices

The debt servicing burden for households reached high historical levels by any measure in early 2008. This reflected both rising debt and the peak in mortgage rates at 9.6%. Rate cuts are seeing these pressures ease dramatically. Housing affordability, which also deteriorated sharply through 2007 and early 2008, is also improving. On our estimates, affordability is already back at 2002 levels in Sydney and 2003 and 2004 levels in Melbourne and Brisbane respectively. This improvement coupled with a severe shortage of dwellings is expected to limit house price weakness over the next few quarters. However, the risk is that recent price softness carries into Q4. With confidence also likely to be fragile short term, wobbly prices may also inhibit any rate-driven recovery.

Commercial property

Although conditions in commercial property markets differ greatly from the disastrous experience of the early 1990s, this segment is again vulnerable. The gearing on large transactions is notably lower and occupancy rates are high with no evidence of a glut of space. However, valuations have reflected the excesses of the liquidity boom with yields being very lose to bond rates. An inevitable move to sharply lower valuations will be challenging, especially in an environment of falling office employment, and weak retail spending and industrial activity. This highlights again just how important it will be to cushion any potential deterioration in the labour market with aggressive easing in fiscal and monetary policy.

Source Document - Wetspac Bank
Tony Hoffman CA Director
Hoffman Kelly Chartered Accountants & Business Advisors

If you wish to speak with Tony about tax or business advice contact Morpheus Property on 1300 727 586 or via email at

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