The Loewy Blog Edition 6

Here is our current view of the economy and forecast of various trends.

Interest Rates – Borrowing

Current rates on residential security
2 – 3 years fixed rates 5.7 – 5.8%
Variable at around 6%

RBA not in a rush to further cut rates. They are adopting a wait and see attitude for the global impact of the continued problems in Europe, tepid growth in the USA and a slow down in China. We note Westpac’s Bill Evans predicts a 25 base point cut in August and September and a further 25 base point cut in the December quarter.

With no inflation threat, slowing growth, low consumer confidence and worries with job security, we support the view that variable and long term rates will trend downward over the next 6 – 12 months.

Commercial Business Loans – anything borrowed at BBSY + 2% is excellent borrowing.

Term Deposits

Current 6 – 9 month rates are currently between 4.85 – 5%, rates for 1 – 2 years are almost at the same rate. We see further downward pressure on these rates going forward and predict a drop between 0.3 - 0.7% over the next 6 – 18 months on the above rates. Banks are awash with funds with a lack of business requirement for borrowing and a genuine desire for banks to reduce their balance sheets under new Basel III rules.

Sharemarket

Our previous prediction of a flight from term deposits and bonds to quality high yielding dividend shares continues. We are seeing changes in clients’ position out of commodity to defensive stocks. This can be best illustrated by the 6 month share price comparison of BHP and Telstra.

Telstra share price growth last 6 months 22%
BHP share price loss last 6 months 19%

There is a march into defensive stock i.e. Banks and Telstra and other high yielding dividend stocks based on the perception that the market will continue to be flat over the next 12 to 18 months and the perceived risks globally. In our view, there will be continued acceleration to defensive stock with yield as investors continue to divest out of term deposits and bonds.

 Foreign Exchange

We continue to predict a narrow trading range of the AUD/US$ of AUD.97/US$1.03 in the next six months. A medium forecast of 44 analysts surveyed by Bloomberg News is for a rate of US.99 by December 31, 2012. Any deterioration of China being larger than the anticipated slow down could put further pressure on the A$ outside the predicted ranges.

Real Estate

Sydney clearance rates are at about 56%, the range has been consistent for the last few months between 52 – 58%.

Stock up to $600,000

Good clearance rates being experienced with strong prices also due to the cessation of the NSW Stamp Duty Scheme.

Prices will continue to be strong as interest rates decline and employment numbers stays steady. Investors will also return to this category as deposit interest rates drop. First home buyers will also continue their return to this class as rentals increase and interest rates drops. We see some upside in this segment of the market.

$600,000 - $1.5M

Slow growth or sideways movements in this end of the market is predicted for the next 12 months.

Above $2M

We are starting to see a bottoming of the market and this will continue in the next 6 months as vendors become more realistic and the number of days to clear stock decreases. Again we predict sideways movement for the next 12 months.

Perth

There seems to be a shortage of stock and rental properties in the Perth market which could lead to some upward pressure in prices over the 6 – 12 months. Perth rentals have averaged increases of 6 – 7% over the last year.

Tom Loewy

Disclaimer – The material contained in this newsletter does not constitute advice. DPL & Co Pty Ltd is not responsible for any action taken in reliance on any information contained in this newsletter. Anyone reading the newsletter should not act upon material contained in this newsletter without appropriate consultation.