RBA's rate cut a call to the real estate cavalry

If there is one thing we have learned in 2012, it is that political parties from both sides will say and do anything to win an election, no matter what the consequences. If we are to learn just one thing from the global financial crisis, we must focus on one word – DEBT. What made the GFC even more contagious was government debt. So why do households and businesses react differently to governments when confronted with the same financial woes?

The debt we can’t pay is growing a fascinating insight from Rob Burgess on Business Spectator, where he correctly refers not to an economist or business writer but the former head of the Future Fund, David Murray. Mindful of the fact that Commonwealth net debt is only 9.6% of GDP, combined state and federal debt is now around 29% of GDP. This quickly brought a rebuke from Prime Minister – Comparing the Greek economy to Australia is ‘absurd’.

Enter David Murray again, who believes “it is easily possible for Australia to suffer an economic downturn similar in magnitude to the one experienced by Greece”. The problem for the Gillard government is that its own debt continues to far exceed income and ignorantly, it refuses to cut its own overheads. On the other hand, businesses have cut costs, which explains why tax receipts are down and Australia finds itself in a state of hypocrisy. Let’s join those dots again.

This week we saw the Reserve Bank of Australia (RBA) lower the cash rate to 3.25% from 3.5%. A call to the cavalry – let the real estate market steer the economy to bigger and better things. Although – The RBA’s interest rate kryptonite “it is now clear that the Chinese comeback that prompted the RBA to raise the interest rate six times between October 2009 and May 2010, and then again in November 2010, was unsustainable. That 1.75 percentage point increase in the cash rate in 2009 – 10, while the Fed, the Bank of England, and the ECB and the Bank of Japan all left their rates on hold, helped lift the Australian dollar from 65 cents in early 2009 to 110 cents last year. The increase in lending rates for households and businesses knocked the stuffing out of the Australian economy”.

So here we go again, throw more lollies onto the highway and see who runs out to grab them.

The correct unemployment rate in Australia unemployment hits 10%, which is almost double the Australian Bureau of Statistics’ (ABS) unemployment rate. The irony is, that businesses have corrected their profitability yet the federal government refuses to move with the times. This would also explain why the newly elected Queensland, NSW and Victoria governments are tightening their belts – States face GST squeeze: S&P.

If the federal government were half smart (and our pollies are not) it would immediately bring GST into online sales above $50 (presently above $1,000). It won’t happen because the federal government is more concerned about losing votes with an election looming. When the GST was introduced in 2000 computers (online) were not even a consideration. Times have changed, yet our federal government won’t change!

The good news for vendors on the home front as our markets move from a purchasers’ market to a vendors’ market. Certainly another cash rate reduction will only further ignite the property markets. Having said that rate cuts shows Reserve Bank’s sober view of global economy although it must be noted lower rates risk fuelling bubbles: ANZ – a possibility, however, a tad early to call.

I believe our market is too smart to fall into that trap.

Robert Simeon is a director of Richardson  Wrench Mosman and Neutral Bay and has been selling residential real estate in Sydney since 1985. He has also been writing real estate blog Virtual Realty News since 2000. The RWM real estate model has sold in excess of $1 billion in database sales globally.