“Investors need to keep an eye out on international markets” says some commentary. Sure. But realistically who does that 🙂
What you DO NEED to know is where funds come from to support our banking system. And a lot of it is NOT from our domestic market. But rather from overseas.
It’s always important to see how the overall market is performing in Australia, but according to the Housing Industry Association (HIA), investors and even home owners, who intend to go for another loan need to keep an eye out on something bigger than the Reserve Bank of Australia. Here’s why.
To purchase an investment property, your own home, upgrade or downsize or even request a loan extension for some home improvement – you need a loan. Well 95% of us choose to use leverage rather than expose large chunks of equity at one time.
Without loans, we would have a much harder time investing, and even though we would be investing from Australian banks, HIA’s principal economist, Tim Reardon, believes not only should the state of the Australian economy be considered when securing a loan but also the global economy at large.
According to Mr Reardon, this is because Australian banks are only as strong as the conditions that allow them to give out loans, which is influenced by the global market as well as conditions at home.
“The costs of finance to Australian banks is as a consequence of cost of borrowing globally, and what’s likely to play out in the next couple of years is that there is a timing of that money supply,” Mr Reardon said at an industry briefing.
“Post GFC, there was a flush of both loose behind monetary policy and loose fiscal policy which gave us a money supply volume that was largely unprecedented post Second World War, so that would give us the only point in time where we would have a reference to look at, to see what happens when you start to restrict that supply of money.
“As those US, UK [and the] rest of the world pick up and they start to tighten their fiscal policies and they
start to tighten their monetary policies, that supply of money tightens, the cost of borrowing for Australian banks increases,
so regardless of what happens with the Reserve Bank, the cost of borrowing domestically is likely to rise.”
For example, when the Nasdaq Stock Exchange experienced a fall in February, Mr Reardon said that this was felt globally with a curbing of the supply of money.
Other influencers, the principal economist said, include how major international trading partners are keeping Australia up and not down; the growth of India overtaking China; and how the pressure for interest rates to go up rather than down is being felt globally, not just in Australia.
So what does this all mean? Interest rate rises are coming. Rates will go up over next 12 months and longer – not down.
We have bottomed out and the global economy fiscal tightening is a simple supply versus demand effect. As accessing a limited supply globally becomes harder – the costs to do so increase which in turn results in higher costs to the banks and this in turn is passed on in the form of higher interest rates.
Higher rates are coming. In fact increased rates have already started happening in the Australian lending market. You need to understand your investment and finance strategy and ensure you have a plan in place to deal with these changes.
