Interest Rates Remain on Hold - Nothing's Changed ... Yet

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Interest rates remain on hold at 1.50% by the RBA. What is somewhat ironic is that at the same time, there is a parliamentary inquiry into why the banks have not left interest rates on hold. RBA Governor Philip Lowe has stated that there has been an improvement to the global economy, though some uncertainties remain. He makes the case that America has passed the bottom of the interest rate cycle and that inflation has now started to rise in many advanced economies whilst the expectation of quantitative easing largely diminishes.

Whilst the Australian economy has been expanding at or near 2.5% for 2016, this has been very geographically specific. Combined with this has been a decline in household spending and lower wage growth which is stretching many household budgets to breaking point. Headline inflation is expected to pick up to 2.0% in 2017, though this is going to be determined to some extent by what the investment cycle does and also immigration.

Those homeowners sitting in Sydney and Melbourne must surely be watching their equity increase whilst other cities like Brisbane, Perth and Adelaide are wondering when the growth differential will again narrow. Until international migration is more evenly split between the States, the answer to the above is "not anytime soon." And yet if there was to be a hiccup in property prices, it is arguably Sydney and Melbourne that would feel it the worst.

With interest rates remaining at record lows, it has to be the government that provides stimulus for business, for infrastructure or both. If nothing changes, then the result will not change. Property affordability will not go away by thinking about it. Government incentives to provide a boost for first home owners is applying a band aid but failing to deal with the problem that is creating the cut.

2017 remains a very interesting year with so much mud in the water it is difficult to see what the balance 9 months have in store for the nation. One thing we do know though is that the east coast construction industry will remain flat out well into 2018, just check the cranes in the sky and the bulldozers on sites.