RBA will have to cut cash rate to support non-mining industries: Robert Simeon

So now we are officially told that Australia’s resources boom is over. The Australian Bureau of Statistics has just revealed that capital expenditure in mining peaked in mid-2012 then went into negative growth over the following six months culminating in a plunge in the March quarter of 2013 – which wiped $1.5 billion from Australia’s quarterly output.

This then turns the full attention to Australia’s non-resources sector which is not really performing all that well either. Australia’s federal government has been living in an economy nothing short of being off with the pixies given Australia’s fiscal policy is “up the creek without a paddle”.

So it will be the responsibility of the Reserve Bank of Australia (RBA) to start cutting the cash rate, starting this month, to bring the Australian dollar down to incentivise the non-mining industry. The other problem the RBA is facing will be controlling the beast from within – the real estate industry – given Sydney keeps posting auction clearance of 75%-plus. Historically, when clearance rates hit 80% our property markets are in boom mode.

Although this time around I see a totally different outcome given we are still in the hangover of the Global Financial Crisis (GFC) – so households will be more content with locking in the lowest possible mortgage rates. In Sydney we are seeing under-supply not oversupply. This scenario could very well change after the federal election on September 14 – should there be a change of government given property markets historically perform better under a Liberal government. A point the RBA will be most mindful of – the burning question now is just how low will the RBA drop the cash rate?

Australia’s GDP only increased by just 4% in the last five years which is somewhat scary given the resources industry investment last year comprised 60% of Australia’s GDP. The good news is that recent Top 100 Australian CEOs surveys welcome a Liberal government which is a positive sign for our economy. The negative is that the incoming government (like the RBA) will face the mother of all tasks finding a happy medium within the Australian economy.

Australia the world’s happiest nation: OECD based on income, jobs, housing and health, despite signs of a slowing economy. Australia has now held the top spot for the last three years. The elephant within the economy will be what happens with employment although this can be seen as a positive as businesses have re-calibrated following the GFC to see them embarking on new strategies.

Again not much change in the volumes which still remain down when compared to this time last year. We expect this to pretty well remain the case until August when vendors start engaging the property markets based on the upcoming election hype.

Source: Australian Property Monitors

MOSMAN – 2088

• Number of houses on the market this time 2012 – 97
• Number of houses on the market last week – 83
• Number of houses on the market this week – 85
• Number of apartments on the market this time 2012 – 101
• Number of apartments on the market last week – 67
• Number of apartments on the market this week – 64

CREMORNE – 2090

• Number of houses on the market this time 2012 – 15
• Number of houses on the market last week – 8
• Number of houses on the market this week – 8
• Number of apartments on the market this time 2012 – 36
• Number of apartments on the market last week – 19
• Number of apartments on the market this week – 15

NEUTRAL BAY – 2089

• Number of houses on the market this time 2012 – 18
• Number of houses on the market last week – 9
• Number of houses on the market this week – 11
• Number of apartments on the market this time 2012 – 56
• Number of apartments on the market last week – 28
• Number of apartments on the market this week – 34

From an economic viewpoint it was pleasing to read Alan Kohler write on Business Spectator – How Abbott would raise Hilmer from the dead – “The Coalition is planning to resurrect National Competition Policy if elected in September, including paying state governments to privatise. It’s also looking at ways to encourage infrastructure spending by providing Commonwealth guarantees and attracting investment from super funds, and is also considering keeping accelerated depreciation for business development.”

It is no secret that Australia needs a major infrastructure injection to get the non-mining industries back on the front foot. For this to happen we could very well see Australia’s cash rate fall to as low as 2%.

The next few months will be fascinating although we can expect to see businesses having a greater say to the Liberal government which will be in contrast to unions telling the Labor government how to run the economy. Based on polling it is quite apparent that Australians much prefer the former.

Robert Simeon is a director of Richardson  Wrench Mosman and Neutral Bay and has been selling residential real estate in Sydney since 1985. He has also been writing real estate blog Virtual Realty News since 2000. The RWM real estate model has sold in excess of $1 billion in database sales globally.