EXPERTS CHANGE THEIR FORECAST – PREDICT CASH RATE DROP NEXT YEAR!

It’s been an interesting week of economic news and I’ve learned a new word – “income recession.”

Well…actually it’s two words that have been bandied around since the ABS published the quarterly national accounts on Wednesday

I know that a recession is two consecutive quarters of negative growth of real GDP — that’s the total value of production minus inflation.

However, currently our real net national “disposable income”, which measures what Australian governments, businesses and households receive in exchange for goods and services, has  contracted for the second quarter in a row.

This is very different and has happened before, but has obviously been enough to worry some economists.

Experts forecasting rate drop.

Just over a week ago I reported the findings of the Reserve Bank interest rate survey but since then an update of this Survey by finder.com.au shows eight experts are now forecasting a possible cash rate drop next year – five of which have changed their predictions from last week.

These are the five experts who have changed their cash rate forecast from last week:

• Shane Oliver, AMP Capital
• Scott Pape, Barefoot Investor
• James Bond, Financial Services Council
• Noel Whittaker, QUT Business School
• Bill Evans, Westpac

Just last week, there were three other survey respondents who were expecting a cash rate fall next year, including:

• Andrew Wilson, Domain Group
• Stephen Koukoulas, Market Economics
• David Scutt, Scutt Partners

What this means for property:

With news of possible interest rate drops, it’s likely to heat the property market further, by fuelling competition and higher bids for property auctions.

While it’s good news for existing borrowers as lower mortgage repayments are on the cards, it’s bad news for first home buyers, who are already struggling to enter the property market.

A recent Home Loan Insights Survey showed that more Australians have given up on the property market and are choosing to rent.

There were triple the number of first home buyers preferring to rent (32%) than commit to a mortgage, compared to last year (10%).

There was also an increase in the number of Australians who are staying home, with 14% admitting that it’s easier to live with their parents, compared with 10% 12 months ago.

It’s important for first home buyers who are planning to buy to not overstretch themselves, as interest rates are expected to rise in the next couple of years, even if there might be one more rate cut.

Borrowers and prospective homebuyers need to prepare for a buffer of at least 2 percent, which means an extra $400 per month in mortgage repayments for a $300,000 home loan.

If you can not afford this extra cost, you will be in over your head and you need to consider reviewing your budget or lowering your costs by refinancing or renegotiating with your lender.