Where to next for interest rates?
The Reserve Bank of Australia (RBA) decided on 2 July to lower the cash rate by 0.25% to 1.00%. Analysts immediately predicted further interest rate cuts ahead with NAB and others forecasting a cut of 0/25% by the end of the year to give a cash rate of 0.75%.
This is great news if you are a borrower and your bank decide to pass this on, but this is not great news if you have cash on deposit.
Then there is inflation. In its minutes published after the meeting, the RBA states the central scenario remains for underlying inflation to be 1.75% this year, 2% in 2020 and a little higher after that. So essentially based on the RBA cash rate of 1.25% money on deposit loses 0.5% of its real value year on year.
For those with large cash deposits, the situation is not as bad as, say, Germany where the central bank offers minus 0.35% (yes, you read that right) but it is clear that the message from the RBA is: “Go out and invest!”.
The next problem investors have is that right now the Big 4 banks are proving very reluctant to lend on commercial property, and who can blame them – they are able to borrow very cheaply from the RBA and can happily sit back with these funds in the money market, taking an overnight clip as well as through consumer finance and other high margin activities.
Into this vacuum has charged a number of 1nd tier lenders, anxious to get a return on their own funds, entrepreneurial players who are keen to lend on good real estate.
Stamford Capital in Sydney report they have been able to lend up to 70% Loan to Value (LVR) with interest cover ratio (ICR) of 1.5%. And the interest rate for this loan? 3%.
According to Stamford Capital’s Michael Hynes “Interest Cover Ratio (ICR) is now the key metric for most banks in their credit assessments.
Banks typically require a 2 x ICR, whilst the non-bank and second tier banking markets are able to allow an ICR as low as 1 – 1.5 x.
Overall credibility of an investment and strength of a sponsor are obviously important aspects, but strong yield and a dependable lease are at the forefront of the credit assessment.”
Looking ahead in the medium term there are reports the RBA may well indulge in “quantitative easing (QE)” – that is, outright money printing via the bond markets, the aim of which is the push the major banks back into the lending market.
QE is not unusual in overseas markets. The US Federal Reserve, European Central Bank and Bank of England for example, have all done the same since the Global Financial Crisis and the Bank of Japan has done since the 1990s.
The RBA will just be playing catch up with the rest of the world which is understandable given the underlying strengths of the Australian economy. In global terms, the GFC barely touched these shores.
But what does this mean to you as a potential property investor? With low and falling interest rates and new lenders happy to take a view and back good real estate, if you see the right opportunity then you really should speak to a Burgess Rawson agent and get in before the rush.