Limited rate effect

Back in late October Sell on News posted a note from Deutsche Bank explaining that an interest rate cut was unlikely to have much affect on equity values. In a similar vein I note that Gail Kelly said as much about the rest of the economy on the this week’s inside business from the ABC:

ALAN KOHLER: And you’re seeing the need for further rate cuts here, aren’t you, in Australia?

GAIL KELLY: I think we’re going to need more than one. Clearly let’s wait and see how Europe travels over the next period, although there don’t seem to be too many signs that things will settle too early. The issues there are so complex and there’s so much at stake and I think we’re in for a long haul as far as Europe is concerned. And I think what’s going to happen will be that customers will take the extra cash that they’ve got and probably apply it more to debt repayment and to savings and still wait and see if overall sentiment improves. Having said that, terrific that we’ve had this rate reduction because I think it will start to turn the dial a little to a little bit more in the way of confidence setting.

ALAN KOHLER: But actually what you’re pointing to is the fact that it won’t have that much impact, I mean in the sense that people won’t reduce their repayments on their mortgages straight away, will they? I mean, they’ll probably keep repaying the same amount, just get it off their principal.

GAIL KELLY: Well, I think people will deploy whatever additional cash that they’ve got, either to save or indeed to repay further debt. So I think that’s what’s going to happen, rather than go and spend more. Because ultimately obviously what we need for the economy to grow is for people and businesses is to regain confidence and to decide now’s the time to spend more and indeed to invest more. But I think we’re a little bit off from that at this point.


ALAN KOHLER: What is the lending book at the moment telling you about the economy. I mean, business lending was quite flat, in fact I think it went backwards. Home lending’s reasonably strong. But what are the nuances within that, the messages you’re getting from the – about the economy?

GAIL KELLY: That it’s slow, that customers are cautious, that they’re preferring to sit on their hands at the moment, that they’re preferring to save, they’re preferring to pay debt. A number of consumers and businesses found themselves with far too high gearing levels through the midst of the Global Financial Crisis don’t want to find themselves in that position again. So I don’t think it’s a bad thing. It’s meant that we don’t have further asset bubbles. And property prices, while they’ve softened a little, they certainly haven’t fallen.

Did Gail Kelly just admit Australian housing was an asset bubble? Maybe I am misinterpreting that answer.

Either way it seems that Westpac is expecting the latest rate cuts to have a limited effect on spending by consumers and asset values. Although it is probably too early to determine if that is the case, the first weekend’s real estate auction results suggest that Gail Kelly could be correct:

A much anticipated rate cut and blue skies did little to revive sluggish sales in Australia’s largest housing markets on the weekend.

Property owners and real estate agents had hoped the Melbourne Cup Day rate cut would jolt a lifeless market into action but the weekend auction clearance rates for residential properties in Sydney and Melbourne were way below expectations.

Despite healthy crowds in both cities, the auction market remains largely a spectator-only affair with about half of all homes being put to auction failing to sell under the hammer.

In Melbourne only 52 per cent of the 498 houses and apartments auctioned sold, while Sydney recorded a clearance rate of 55 per cent.

That certainly looks like and more of the same to me, but we will need to wait for some further data to get a clearer picture.

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    • Kelly will be talking from a bank point of view. the small falls we ahve seen are not putting bank assets at risk.

      In areas like the Gold Coast where real falls are evident, the banks stopped high LVR high value loans some years ago, and any at risk loans would have been tidied up by now, or at least monitored closely. Some LOC’s have been reduced. It has also given them some data and experience on what measures to take. I can’t see those falls being replicated across the broader market, so she will be comfortable about the risk, especially if we see some more rate falls, as that takes pressure off borrowers who can request interest only repayments.

      One more reduction will reduce holding costs by a significant proportion, two extra reductions (total 0.75%) will effectively deliver a cost reduction of over 10% for most borrowers.

      It would also take a lot of pressure off investors who do use I/O repayments. It would be as effective as a 10% rent increase. The reverse will apply when rates rise again. So rate reductions effectively protect bank assets and promote lending volumes.

      I think she was qualifying rather than quantifying the falls.

  1. FYI, MORTGAGE Choice, are running around screaming that they’ve had a 357% increase in hits on their how much can I.borrow calculator. It takes months to buy a house, might see a little bit of interest post Xmas imo. Not enough to change the trend though.

    • So 357% more people just found out it hardly made any difference in the overall affordability of that 600k dog-box? 😉

      Agree with your sentiment though – while a cut would see a greater rush in a rising market, it will take a few weeks for impact (if any) to be felt in this market. Noone’s in too much of a hurry.

    • That would be a lot of people just checking how much less they have to pay on the mortgage for their current dog-box, wouldn’t it?

  2. My info, based on a small sample, suggesting a 5-10% uptick in sales over the last week. This is similar to the small bow wave noticed after the original Bill Evans rate cut message, months ago. That didn’t gain traction and it will be interesting to see if this one does.

    • That depends where that uptick was and whether it’s above trend or not – Sydney/NSW has the stamp duty concession expiring soon and we’re coming up to the settle-before-Christmas cut-off so there’ll be a natural uptick in sales at this time of year anyway.

  3. Ok so I understand people are not like me , where they check if they can service the loan at 9%, although I firmly believe it wont touch those numbers for a very long time

    • Considering the last high of the rate cycle (4.75%) was almost the same as the post 9/11 emergency low (4.25%) I think it’s safe to say we’re on our way to ZIRP in another cycle or two.

      Still, you’re a smart person factoring in the ability to repay at 9% as one never knows what could happen in this crazy world.

  4. reusachtigeMEMBER

    Good! I hope the rate cuts have limited effect. Actually, that’s not true, I hope the cuts actually speed up the crash, especially in housing. I want this all over and done with so that we can rebuild. I’m sick of death by a thousand cuts.

    • Without a debtageddon event the Australian housing bubble will continue to die the death of a thousand cuts. Get used to it, as we’ve got the better part of a decade of slow, real terms correction to go.

  5. GAIL KELLY: I think we’re going to need more than one. Clearly let’s wait and see how Europe travels over the next period.
    It is good to hear that Westpac isn’t waiting for the RBA to cut rates and is independently assessing the Euro situation before delivering rate cuts to its customers 🙂

  6. If you follow the thesis of Richard Koo of Nomura re Japan and the effect of austerity on economic activity rate cuts will be needed as the government continues Australian austerity in its quest to reach a nominal budget surplus. That is independent of Europe which will simply add to global austerity. Chinese and Indian growth and growth in supply of iron ore, coal and LNG/CSG are also very relevant to Australia given the size of the resources sector in the Stock market.

  7. Why is Kohler interviewing Kelly as to whether she thinks we should have more rate cuts? Of course we should. The more BS in low interest rates the more debt and the more profits for Banks, the less real production.
    This whole system is so in-bred.

  8. lower rtaes makes cash and bonds less atrractive, therefor on relative terms means stocks become more attractive.