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Investments, Listed Property

Rates will be lower for longer

Interest rates

Interest rates are unlikely to reach higher levels for some time, but the housing sector will benefit from the current conditions.

Investors need to recalibrate their thinking around interest rates and returns and get used to the likelihood they will not bounce back as quickly as they have in the past, according to a senior equities manager.

T Rowe Price head of Australian equities Randal Jenneke said growth in the share market was at a 10-year low at the same time as inflation and wage growth were stagnant, leading to downward pressure on interest rates.

“All of those fundamental factors are driving interest rates to where we are, and while I do think we’re going to see some improvement because the starting point is just so low, in terms of growth I don’t think we’re about to go back to a 3 to 4 per cent-type growth environment,” Jenneke said as part of a recent media briefing in Sydney.

“So therefore we’re going to be in this lower-for-longer world when it comes to interest rates and valuations or multiples at these levels are likely to be sustained.

“I hear some of my peers talk about mean reversion and why it is going to change and I would say people need to recalibrate their thinking; the environment has changed.

“You need to recalibrate your thinking around what is the appropriate interest rate setting for the environment we are currently in.”

Despite this, he said the Australian housing market was positioned to rebound in the latter half of this year, which would have a flow-on effect for the wider economy.

After the 2019 federal election, the housing sector looked dire and the Reserve Bank of Australia took steps to address the lower level of growth in the economy, which would continue to have an effect this year, he said.

“If you cut rates, you stimulate the interest-rate-sensitive part of the market, which is housing, and when you cut rates, what do Aussies do? Buy houses, it’s almost as simple as that,” he said.

“The best sign of what’s going on in the housing market starts with auction clearance rates and this time last year auction clearance rates were stuck in the 40 to 50 per cent range and house prices were falling,” he said, adding there were ongoing concerns around a change in government and possible negative gearing and capital gains tax changes.

“Roll forward 12 months and the auction clearance rate is now almost doubled and is 75 per cent in key markets. In the back end of last year there was the sharpest recovery in house prices in a decade and what typically follows with a lag of nine to 12 months is building construction activity.

“Building approvals are still falling, although they seem to be stabilising, and when you get to the back end of 2020 is when we will start to see some sort of pick-up there.

“The other thing that typically happens obviously when house prices go up is that a wealth effect also starts to kick in, so I think housing really is the key story that is going to underpin and improve consumers and help growth over the course of 2020.”

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