Why Yesterday Was a Big Deal

We mentioned in the news yesterday where Australia may differ in Bank of America’s global predictions of property (together with gold) being the best investments going forward.  This was reinforced yesterday in the shock move by Westpac to raise interest rates on owner occupier home loans, with them and others having already done so for investment properties.  This prompted Fairfax business columnist Elizabeth Knight to state:

“History will show that if there was a day that marked the start of the end of Australia's residential property boom, it was today.”

She certainly wasn’t alone with such sentiment and it also prompted Goldman Sachs to say it now sees a rate cut by the RBA in November as “highly likely” and most likely more again in 2016.  The other big banks are widely tipped to follow Westpac’s lead as well.

Whilst principally blamed on bolstering capital reserves ahead of any market shock, many believe we are also seeing a realisation by the banks that they have over exposed themselves to a property bubble born of ultra low interest rates which would only be worsened with another rate cut.  When interest rates eventually climb there could be carnage in the property market as loans become unserviceable, particularly in light of low expectations of wage growth and job security going forward in Australia’s fragile post mining boom economy.  This fragility was further reinforced yesterday with more terrible economic data out of China.  This move could well be the banks getting ready and trying to limit the extent of that carnage now.

Of course another rate cut in November should also see a drop in the Aussie dollar which is always good news for Aussie precious metals holders.  The AUD is caught in an interesting dynamic right now where it dipped on the China news yesterday but rose last night on further weakening of the USD.  The latter however is due to the now very apparent weakness in the supposed economic saviour of the world.