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The Effect of Economy on Property Values

cash rate reductionIn an article for the website Property Observer, Jonathan Chancellor talks about Glenn Stevens’ viewpoint regarding Sydney house prices and prevailing interest rates. The property values in the harbour city have already witnessed a hike of around 33% since the year 2012.

Interest rate to hold or to come down?

Stevens has offered more than a cursory glance for us in the past on what shapes the cash rate decisions. In his latest speech, he has once again addressed the issue quoting that further rate cuts can always take place. At the moment, the Australian economy is on a soft land and this means that it cannot add to the inflationary pressure. Also, the growth of employment being weak, it stands little chance of triggering a wage-driven breakout in prices.

Direction of the monetary policy

This said, he also shed light on the direction monetary policy could take, given that household debt is at a very high level at the moment. Household leverage being as high as it is clearly looks like a double-edged sword. Of course, there are talks in the air which point at the reduction in leverage.

Relaxed monetary policies have led to the shooting up of property values, higher perception of wealth, higher purchasing power and subsequent spending. The factor, perception of wealth, will facilitate consumption; which, over the course of the year, may overtake hike in income.

You can read the original article here.

Household leverage too high

Glenn Stevens is not talking though his hat and he certainly knows the grind a lot more than many. Having said this, he will need to keep a close eye on certain facets of the economy which may be at the periphery for now but won’t take long to take centre-stage if the government fails to get the balance right.

Yes, there is certainly a possibility of a rate cut but for now the rates better hold. Perhaps no time before August is good to revise the rates further, given the present levels of household leverage, property values and interest rates themselves. Unemployment stats have softened down a little (from 6.7% to 6.4%) but what relief it can bring for the monetary policy and how it may affect the economics of household debt, spending and income/consumption metrics remains to be seen.