Latest NewsFebruary 2008 Newsletter 2008 Says “Hello” with a Bang As people around the world celebrated New Year’s Eve and the fireworks that went with it, few would have anticipated the extent of the change that we have witnessed in the first month of 2008. The US property woes have worsened, the knock-on effects have hit major property groups and banks, and there is fear that the US is poised to slide into recession, with world stock markets see-sawing by the day. The term “margin call” is now better understood! It has changed from being a theoretical selling concept underlying the principle of leveraged share acquisition to one that can cause panic amongst exposed investors suddenly required to top up their Loan to Value ratios (LVR) with either share guarantees, cash injections, or in the worst case, the sale of shares at bottom prices to meet their margin commitments (ouch!). While the dramatic action by the US Federal reserve to cut interest rates has served to halt what was becoming a share market implosion, the jury is still out in terms of whether the decades of budget deficits and the years of extremely low interests rates to drive economic growth have finally caught up with the US economy, and whether a long-term downward adjustment for that country is now on the cards and underway. If the value of the US Dollar is anything to go by, we are moving through an upheaval in terms of the declining influence of the once-invincible US dollar and economy. Australian Economy Steaming Ahead In sharp contrast to the US, the Australian economy is robust and gaining momentum. While the Australian share market went into temporary freefall along with world markets, it is worth noting that Australia’s ever-strengthening ties with China (our new Prime Minister, Kevin Rudd is the only Western leader in history who speaks fluent Mandarin) and the high-growth markets of the East are serving to lessen the historical relationship with US-led economic influences. The demand for raw materials to feed the insatiable furnaces of China’s growth continues unabated, and the economies of WA, Queensland and South Australia are full speed ahead as a result. The two-speed Australian economy continues to create a divide in the fortunes of employees and investors by state, and for the foreseeable future the states with economies skewed in terms of raw materials and agriculture will continue to out-pace others such as NSW. Interest Rate Rise No. 11 in a Row The surging economy and continued consumer spending and credit growth have forced the Reserve Bank to lift the bank rate for the eleventh time in succession to 7%, the highest since late 1996. And the forecast is that there’s more to come to prevent a breakout in inflation in the year ahead. For homeowners with big mortgages this spells belt-tightening, coming on top of the independent move by banks to lift rates and other cost pressures such as fuel and food prices. For renters the continued upward movement of rentals seems certain as investors are forced to adjust rents to maintain returns, which in turn adds to the inflationary spiral as a further and unwelcome side-effect. Despite the risk of homeowners and tenants being unable to meet payments, the rate of consumer spending and credit demand is yet to slow. The government’s commitment to curb spending and generate increased surpluses will assist in terms of national savings, but we can expect to see interest rates continuing to drift upwards until such time as it is clear that there is a change in trend in terms of underlying inflation. What Impact on Property? The lead economist at the Commonwealth Bank, John Peters, forecasts an increasing strong rental growth and a continuing imbalance in the supply of housing relative to demand caused by:
This view on the upward pressure on house prices is shared by the economist, Helen Kevans, at JP Morgan, who anticipates the development of long-term renting as an enforced situation for increasing numbers of people who are unable to afford to buy a home of their own. This would mirror trends in many European countries where, for reasons of economics and changing social preferences, a significant proportion of the population rent rather than buy because of affordability. What is clear is that the set of conditions unfolding in Australia will continue as long as demand continues to outrun supply. This is positive for those with their own homes and for property investors, but negative for the millions of renters who face escalating rental prices and a shortage of available accommodation as their life reality. McCarthy Group Events Our first Sydney “Meet the Team” event will take place on 29 February 2008 at our head office in the North Ryde business precinct, and on 28 March we all look forward to a fantastic evening together at our “Party with Attitude” where we expect hundreds of guests as we celebrate the 9th birthday of McCarthy Group in the company of the inspirational Justin Herald, author of “Would You Like Attitude With That?” You should have received your invitation by now (and replied!), but if you haven’t for whatever reason, simply call our Events Team on (02) 9687 3601 or email events@mccarthygroup.com.au. A limited number of places for clients’ guests are still available. See you there. Until then, best wishes and kind regards,
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