An official cash rate of 4.25%, unemployment at 5.5% and failing, increasing rental costs, a general housing shortage, unheard of levels of capital investment into the resources and energy sector across most of the State… sounds like a recipe for boom times and the need for a Thatcherite approach to monetary and fiscal control. Yet the development sector in Queensland remains stagnant with most projects still desperately seeking purchasers or end investors.
In this light the RBA’s announcement of a 50 basis points cut to the official cash rate is big news to the development sector for a range of reasons and the cost of financing a project is, maybe surprisingly, the least important of these.
Most importantly the 50 point rate cut, with industry talking up a further 25 point win in June, provides a psychological circuit breaker that will boost the confidence of home buyers and investment buyers and allow many to cross the confidence bridge to a point of commitment.
For retail and commercial property investment the development trigger is yield and a similar reduction in property yields would drive valuation improvements that will help get many previously marginal projects across the line. Off a base yield of 8.5% a 50 point reduction would cause an increase of 6.25% to the end value of the project. For a project feasibility model ambling along at a respectable but fragile profit forecast of 14% this change will translate to return of over 20% which historically gets the bank calling you for a change.
On Monday the average full mortgage rate across the big 4 banks sat at 7.42% but if the banks break with their previous behaviour and take the advice coming from both sides of government, the cost of mortgage based debt could reduce by nearly 7%. For first time and investment buyers this typically translates to a 5.6% increase in purchasing power needed to pay that last $26,500 to buy a $500,000 2-bed apartment in one of the many excellent CBD fringe projects just waiting for Braedyn and Rebeckah, Wang and Tai, Chandran and Lalita, Abbud and Ismah, or plain old Adam and Steve to take the plunge.
The macro-economic settings in Queensland indicate that we should be in a period of new development and growth in asset value. Tuesday’s cut in the cash rate to a 2010 level of 3.75%, with the hope of more to come in June, may be the turning point in the value curve that gets good developments across the line and the smart money starting to take a position for future growth.
All we need now is for property valuations to reflect greater confidence in the future – but that’s a whole other story…