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Economic Update – 27th October 2014


Low Interest Rates

Low interest rates, low growth and equity market volatility are making it particularly hard for those in their 60s as they approach retirement. Many commentators refer to the conditions as financial suppression imposed on people who have saved hard for retirement their entire life. We examine what is driving low interest rates and how long will they stay low. A diversification strategy is proposed for wealth managers to help them generate income for their clients and protect their capital using tangible security.


Quantitative easing and low real-interest rates have been used to maintain acceptable levels of economic growth in many parts of the world since October 2008. On the 7th of October RBA Governor, Glenn Stevens, stated that,“On present indications, the most prudent course is likely to be a period of stability in interest rates.”[1] Guy Debelle of the RBA recently warned about volatility saying,”One thing which is certain is that the low volatility will not persist.  What will cause it to end? I really don’t know…”.[2] Is it any wonder that people in the 60 plus age bracket are attracted to property, given the equity market volatility and interest rates remaining at historically low levels.


People approaching retirement have turned to property as an investment solution for retirement, given the performance of the alternatives. The RBA noted that while property investment and gearing increased only modestly since the early 2000s, “the share of investors aged 60 years and over increased significantly.”[3]

The relative wealth preservation ability and income potential of property might be the reason.

Consider some alternatives:

– The ASX200 index is still 21% below its Oct’07 high and 6% less than it was at the start of September 2014

– Emerging markets are 24% below their Oct’07 high according to the MSCI Emerging Markets (EEC)

– Term deposits, a highly secure income paying investment, will earn an investor earn less than 4.00% p.a for two years on $200,000, without any prospect of capital gains

The VIX volatility index, also known as the “Fear Index” could reflect growing unease amongst investors.



Construction is seen as a logical economic sector to partially fill the void left by the decline in mining infrastructure investment. Low rates should encourage dwelling construction in support of more than a decade of strong population growth but lenders have not necessarily participated to the extent that they could or the RBA would like to see – graph below. The RBA has signalled persistent low rates and construction lending represents an opportunity for smart investors seeking higher returns.

Luci Ellis of the RBA said recently, “Part of the anticipated effect of monetary policy is to induce more construction activity. Higher prices are the incentive to get that expansion, which is indeed happening. But it is worth noting that the vast bulk of that new borrowing is to purchase existing properties.” [4]

Luci Ellis noted, “At least some of the growth in housing prices since the middle of last year was a bit of a catch-up from a period of weakness. Some increase in prices was to be expected given the current level of interest rates. And housing prices are still within the same range, relative to incomes, that we have seen over the past decade, albeit towards the top of that range.


Low rates and volatility represent a risk for investors. The RBA wants to keep rates low, in part to encourage construction and a lower Australian dollar. But the RBA is keen to ensure property prices do not turn into a speculative bubble. There are early signs that the RBA’s attempt to quell property price growth through jaw-boning is working and we will learn about APRA’s direct actions to ensure the maintenance of prudent lending standards, at the end of the year. Credit Connect Capital’s desire is for investors to be in a position where they are not exposed to property price or equity market volatility.

Carefully selected commercial loans represent one such solution.

Investors can earn a fair monthly income in the 8% p.a vicinity.

Of course, capital in the commercial loan has to be secured by a registered first mortgage over real property, often residential and the property has to be independently valued to ensure that the low loan to value ratio is legitimate.

Find out more at www.ccc.com.au or by emailing Martin Venier at martin@ccc.com.au.

[1] Statement by Glenn Stevens, Governor: Monetary Policy Decision, 7 October 2014, http://www.rba.gov.au/media-releases/2014/mr-14-18.html

[2] Volatility and Market Pricing, Speech by Dr Guy Debelle, Assistant Governor (Financial Markets), to Citi’s 6th Annual Australian and New Zealand Investment Conference, Sydney, 14 October 2014, http://www.rba.gov.au/speeches/2014/sp-ag-141014.html

[3] Financial Stability Review. Sep’14, Reserve Bank of Australia, p50, http://www.rba.gov.au/publications/fsr/2014/sep/pdf/0914.pdf

[4] Luci Ellis, Head of Financial Stability Department, Reserve Bank of Australia, Speech Sydney. 9 October 2014, http://www.rba.gov.au/speeches/2014/sp-so-091014.html

Disclaimer: This information does not take into account your individual objectives, financial situation and needs. You should assess whether the information is appropriate for you and seek specialist advice from a qualified and licensed advisor.

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