The bank’s announcement yesterday afternoon pushed the Australian dollar one cent higher to more than US84c, the first time it has reached that level since the start of the financial crisis. The sharemarket climbed another 1 per cent to its highest point since November.

Yesterday’s statement was the first in six months to announce neither a cut in rates nor the contemplation of a further cut.

Instead the board expressed concern that improving conditions might ‘‘impinge on prospects for sustainable growth and achieving the inflation target’’, enough to make the market price in an even-money chance of a rate rise in November, and a total of 2 percentage points of rate increases by end of next year.

Such rises would push variable mortgage rates back up above 7 per cent by late next year and add $300 to the monthly cost of servicing a $300,000 loan.

Adding weight to the bank’s contention that ‘‘the risk of a severe contraction in the Australian economy has abated’’, retail figures showed spending in NSW climbing to yet another record high. National spending slipped 1.4 per cent in June but remained more than $1 billion above where it was before the onset of the financial crisis.

Also released was official confirmation of house prices soaring back to pre-crisis levels. The Bureau of Statistics’ weighted average of Sydney house prices jumped 4.9 per cent between the March and June quarters, its biggest jump since the height of the real estate boom in 2003. The Sydney index is now just 2.8 per cent short of its all-time high.

A Deutsche Bank economist, Tony Meer, said the Reserve Bank would be concerned, pointing to last week’s speech by its governor, Glenn Stevens, who said it would be ‘‘quite disturbing’’ if recovery boosted house prices without providing many more dwellings.

The average loan has risen 9.6 per cent in the past year to $266,900 on the back of soaring consumer confidence.

Owner-occupiers borrowed $17 billion, the highest monthly amount in 26 years, and a record level of first-home buyers accounted for more than 29 per cent of home loans.

Loans for new construction rose 8 per cent to 6334 – the highest level in seven years and 50 per cent higher than in December.

Erin Ronaldsen, residential research manager at real estate agency CBRE, said first-home buyers had helped prop up the market.

“In all likelihood the withdrawal of the first-home owners grant boost at the end of December, and state-based measures in July 2010, will have a dampening effect on the sub-$500,000 market,” she said.

“We expect falls could reach 10 per cent from the peak in some areas, depending on local market conditions.”

She said Victorian first-home buyers were getting better value than the national average.

The average value of the loan taken out by Australian first-home buyers has risen $20,400 since the introduction of the boost in October, but Victorian loans have risen an average $10,800.

CommSec economist Savanth Sebastian said almost 20,000 first-home buyers took out loans in May and banks were the big winners from the lending boom, writing almost 92 per cent of all loans.

“Consumer sentiment is well and truly out of the doldrums. The combination of rate cuts, fiscal stimulus and the perception that the worst is behind us has seen a substantial shift by consumers to being more optimistic about the future.”

But it all came back to job security, he said.

“With unemployment expected to rise in the next year, sentiment is likely to retreat from this exuberant level.”

Housing Industry Association senior economist Ben Phillips said the number of loans for new dwellings had risen for nine consecutive months, and he pointed to a modest recovery emerging for residential construction.

The RBA said confidence remained fragile but there were some signs economies around the world were stabilising.

RBA governor Glenn Stevens said Australia’s economy was poised to benefit from the significant cuts to interest rates made so far, combined with the Federal Government’s fiscal stimulus. “Market and mortgage rates are at very low levels by historical standards and business loan rates are below average, reducing debt-servicing burdens considerably,” he said.

“Much of the effect of these changes is yet to be observed. “The stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead.”

Domain spokesman, Anthony Ishac commented, “The official cash rate remains unchanged at the current level in response to signs of a stabilising world economy. However, the RBA remains vigilant, maintaining enough scope on rates to manoeuvre in anticipation of forecast rising unemployment later in the year. Any future action will also need to factor the reluctance of the major banks to pass on rate cuts in full to mortgage holders”.

Most economists had not expected interest rates to come down again.

“In pondering the cash rate level … the RBA board will likely be persuaded by both international and local developments since the April decision to leave the cash rate unchanged,” said HSBC chief economist John Edwards yesterday.

“The downturn in China has been arrested. In a number of other major economies, including the US and Japan, the rate of deterioration is slowing.”

Earlier today, building approvals posted a stronger-than-expected 3.5 per cent jump for March above the market expectations of a 2.3 per cent rise.

Economists said the building sector could be recovering.

“It had been expected for some time that the tight rental market, low interest rates and soaring population growth would translate to stronger building activity, and it now appears to be taking hold albeit from a very depressed level,” said Commsec chief economist Craig James.

“It is important to remember that it does take awhile to for approvals to follow the improvement in economic conditions.”

Australian shares
Part-ownership of a company listed on an Australian stock exchange. Shares provide income through capital growth and dividends, and have the advantage of a low buy-in cost, tax benefits and high liquidity. But volatility is high as they suffer the day-to-day fluctuations of the market. In a down market, they are the easiest asset for investors to sell.

Overseas shares
Stocks listed on overseas exchanges. These offer dividends and capital growth like local shares but not the tax benefits. Have provided lower returns than local shares during the past decade, with higher volatility. Adds to the diversity of investment portfolios. Can be positively or negatively affected by currency movements.
Residential property: Owner-occupied or investment dwellings. Has the benefit of low volatility and strong long-term growth. Investment properties offer negative gearing benefits but have management costs. Tenants can sometimes prove problematic. Highly illiquid, dwellings can take a long time to sell, so are not ideal for investors who need to have their cash on call.

Listed property
Also known as Australian real estate investment trusts (A-REITs). Property-focused shares listed on a stock exchange. Can be purely rent collectors or have exposure to development and funds management. With the liquidity of shares, they are easy to buy and sell. However, values are more volatile than direct property due to sharemarket exposure. Different models offer different levels of risk. Have posted weak returns on high volatility during the past decade.
Unlisted property trusts: Fund managers pool money from a set number of investors, usually to buy a targeted asset or an asset the manager already owns. They are seen as more stable than listed trusts because of their lower exposure to day-to-day stockmarket fluctuations. However, they are highly illiquid – many have set investment periods – and can have costly break fees.

Fixed interest
Investors receive a fixed amount of interest, or interest according to a formula, for periods up to about 10 years. The capital invested is returned at the end of the investment. Includes products such as term deposits, bank bills, unsecured notes and bonds offered by banks, governments and companies. These do not offer the tax benefits of property or shares and do not record capital growth. Can be illiquid, given money is usually locked in for a set period. Have posted reasonable returns with low volatility during the past decade.

Cash
Cash investments include bank accounts and term deposits. They offer stable, low-risk returns in the form of interest. Provide easy access to cash but offer no capital growth. Usually used for short periods. Have posted average returns in the past decade, on low volatility.
Managed funds: These pool investors’ money to buy assets. Investors are allocated units in the fund and receive income from dividends or interest and distributions on the sale of assets. Professional fund managers select asset allocation and give investors access to a wider variety of asset classes than they would usually have. Can be illiquid, making it difficult for investors to access funds. Have posted lower-than-average returns during the past decade, with higher volatility than property but lower than listed shares.

Commercial property
Comprises any non-residential property, including office, industrial, retail, hotel and leisure assets. Can be bought directly by individuals or a syndicate of investors. Good assets have offered strong returns during the past decade, on low volatility levels. However, assets are costly and choosing a good one can be difficult for new investors. Tenants can also be tough to manage. Commercial property assets are relatively illiquid and can take time to sell. Commercial assets have posted strong returns with low volatility during the past decade.

The latest Australian Bureau of Statistics employment figures released last week showed that unemployment rose to 5.7% and boy did the media have a field day, with headlines like; “The worst rise in unemployment in 18 years”.

Unfortunately unemployment will keep rising over the next year or two,; that’s what happens in a recession. So it is natural for us to ask, “How will unemployment affect the property markets?”

Interestingly, as I spoke with numerous investors over the last few weeks whilst conducting my seminars around Australia, many highlighted the fear of rising unemployment as their single greatest concern for the property markets in the near term.

My simple answer to them was – unemployment will affect different parts of our markets differently, but the good news is it probably won’t affect property as much as you fear.

Just putting things into perspective, our current unemployment rate is coming off recent historic lows. In 2001, at the start of the strong property boom that worked its way around Australia over the next few years, the unemployment rate peaked at 7.1%. In 2006 unemployment was at 5% and the 10 year average rate of unemployment is 7.2%.

In fact, most economists consider 5% unemployment to be full employment.

To help you understand this, let’s use a property analogy…

I’m sure you’ve heard that when looking at rental vacancy rates, it is said that our property markets are in equilibrium when vacancies are at about 3%. Higher vacancy rates mean that there are more properties available than there are prospective tenants, so rents don’t rise. When vacancy rates fall below 3% and there are more tenants in the market than there are properties, landlords can push up rentals.

It’s much the same with employment – there is generally considered to be full employment when the unemployment rate is 5%. In fact I remember when first learning about this years ago, many thought we’d never see the unemployment rate in Australia below 10%.

To gain a better understanding of how unemployment will affect property prices there are a number of other points we need to consider.

Firstly, just looking at a figure of say 5% or 7% unemployment isn’t enough. When examining the statistics, we need to look at the participation rate and the levels of female employment, which have risen substantially over recent months as households prepare themselves for the hard times ahead.

The current unemployment figures also reflect the influx of school leavers and graduates who can’t find work, more so than the number of workers being laid off (of course very few school leavers or graduates are home owners who would suddenly need to put their property on the market).

If you think about it, just under 30% of all Australians rent their homes and about 34% of Australians own their homes outright. This latter group are unlikely to put their properties on the market if they lose their job and while those who are unable to work or don’t have work are over-represented amongst renters, they don’t have properties to sell.

The groups that will be hardest hit by unemployment will be the 35% of households who have a mortgage and highly geared property investors.

And of course not everyone who loses their job will suddenly put their homes on the market. Many will come from double income families where both the husband and wife work. Combine this with higher household equity, lower interest rates and the measures being put into place by some of the banks who will delay payments or capitalise interest for up to a year, giving payment relief to the unemployed, and this should result in fewer forced sales and more price stability.

That’s not to say that all areas will get out of this downturn easily. Levels of unemployment will vary significantly from suburb to suburb. Some areas will feel the brunt of unemployment to a greater extent and as a result the property markets in these areas will be affected. For example, Fairfield in Sydney currently has an unemployment rate of over 15%, three times the national average while Bondi has a rate of only 3.7%.

Looking back at the past 3 downturns, rising unemployment did not necessarily cause property prices to fall. In our major urban property markets it seems that unemployment has to rise to above 10% and stay there for some time before it negatively impacts on property values.

In smaller labour markets and especially those based around a single industry, persistent unemployment rates higher than 7% start to affect property prices.

Regional communities, as well as holiday locations, are likely to be in for a bit of a shock. Some are already beginning to feel the heat, including Adelaide which appears to be struggling with relatively high unemployment figures.

Of course different industry sectors will be affected in different ways. The mining and manufacturing industries will be hit hard and areas that have an economy underpinned by these workforces are more likely to fall in value.

And unemployment is not necessarily going to be higher at the bottom end of the labour market, as many people seem to think. Many in the finance, banking and marketing industries are losing their jobs. On the other hand health, education and public service industries will have a low risk of rising unemployment and workers in these fields have more certainty around their income.

As I tend to mention regularly in these market commentaries, there are 2 worlds out there. During this recession some people are hurting, and that is terrible, but others are thriving. The gap between the rich and the average Australian is widening. If you want to thrive and not just survive in these difficult times, please check out details of my new book – Thriving not just Surviving in Changing Times. Please click this link to find out more and order your copy – stocks should be available in a week or so.

Although these statistics are dreadful for people who are unemployed (because they are not just numbers, it’s their life), the reality is if 7% or 8% of the population is not working then over 90% of our population is, and for those people nothing changes part from the fact that rising unemployment will continue to put downward pressure on interest rates…so interest rates will be lower, petrol will become cheaper and their level of disposable income will in turn be significantly boosted.

Some will go into recession mode and put off big buying decisions like a new car, or a new house or an investment property. While others will take advantage of the reduced competition and lower prices and buy that new car, upgrade their house or purchase an investment property before the next property upswing, which will surely come.

These sophisticated property investors see absolutely amazing opportunities out there right now, because the field has been cleared for them. There is much less competition and property holding costs are cheaper.

They will have the confidence to go out and buy the right type of property – one bought well below its intrinsic value, in an area with a proven record of strong capital growth and a property to which they can add value through renovations or redevelopment.

While these investors will thrive in these difficult times, others will have difficulty surviving.

The other thee of the ‘big four’ banks – ANZ, Westpac and St George fell into line with the Commonwealth Bank, who agreed to pass on 0.10 points of the Reserve Bank’s 0.25 point cut. Westpac also undertook to pass on the full 0.25 points to business and credit card customers.

Smaller lenders, including the Heritage Building Society and agribusiness lender Rabobank, passed on the 0.25-point cut in full.

Speaking on the radio, Mr Swan said NAB’s approach was “not helpful when we’re trying to get everyone in the community working together to deal with the global crisis”.

Finance Minister Lindsay Tanner opened up the possibility of withdrawing privileges from the NAB, saying there were “potentially other things we can do, but there are also downsides to those things”.

He and the Treasurer would apply pressure to the bank in private, “but we are not going to do it in public”.

Opposition Leader Malcolm Turnbull said Mr Swan should consider threatening to remove the NAB’s Government guarantee. “The banks have had unprecedented support from the Government,” he said. “They benefit from a deposit guarantee, they benefit from a wholesale term funding guarantee, and despite all of that assistance they don’t seem to pay much attention to the Prime Minister.”

Mr Swan ruled out threatening to withdraw guarantees, saying it would “rebound not just on the banks but on the Australian economy”.

NAB defended itself late yesterday putting out a statement saying that “between September and February NAB passed on more of the Reserve Bank’s cuts than any of our major competitors”.

But the accompanying table showed that wasn’t true for cuts starting in September, with the Commonwealth Bank cutting deeper than NAB and offering rates 10 points lower.

The difference amounts to $18 a month on a $300,000 mortgage.

Consumer organisation Choice blasted each of the big banks that had failed to pass on the cut in full saying the only reason the Reserve Bank cut rates was so the banks would pass on the cut. “But it’s very hard to shop around, and hardly worth it for 10 points when the rates might change again soon,” said spokesman Christopher Zinn.

“This is really the birds coming home to roost. The Government allowed the big banks to take over mid-tier banks such as St George and BankWest. Now there’s very little competition.”

Figures released separately yesterday showed banks accounted for a record 92.4 per cent of new mortgages taken out in February.

“This is the highest market share ever recorded by the banks,” said Coalition housing spokesman Scott Morrison. “At a time when people are asking why banks are not passing on rate cuts it is worth noting that the level of competition in home lending has also reached its lowest level on record.”

The number of new housing loans climbed again in February for the fifth straight month since the Government announced a boost to the first home owner grant.

A record 16 per cent of the new loans were for first home buyers.

Consumer confidence also improved in what Westpac economist Bill Evans said was most probably “a further positive response to the fiscal stimulus package”.

Are we really seeing green shoots of recovery? Yes and no, it seems.

Many of the crucial bits of economic performance, which matter most, are looking better.

Bank stocks in the United States have made record climbs out of the ground-zero territory they occupied before.

China’s economy could be bottoming out already, says the World Bank.

Our own stockmarket, after a period of the most extraordinary decline and volatility (40 days with price movements of plus or minus 3 per cent during 2008 – against 14 in 1987), has also kept a steady climb through March and into April.

As unemployment, the critical indicator for most people generally peaks 12 months after the stockmarket has troughed, then perhaps it is not exactly the beginning of the end of the recession, but at least the end of the beginning. A pathway out is in sight, even if it’s a very rocky one.

Nonetheless, the global economy and Australia’s too are still very fragile. Markets are perhaps most of all responding to a lack of bad news, rather than any great surfeit of good news.

And so much bad news has already been factored in already that the bar for a market recovery has been set very low. But there are still things that could make it worse.

Even though stimulus packages are taking hold in China, the World Bank forecasts growth at 6.5 per cent, or below the 8 per cent level needed to stay on top of unemployment – in a country where unemployment also means the threat of social instability.

Take out China’s performance from the rest of Asia and the picture for the region is truly horrible. The integration of the Asian economies into enormous supply chains feeding the developed world was a huge trade and jobs multiplier in the region when times were good, but unravelled at a rate no one foresaw at the end of last year.

The most shocking has been Japan, where industrial production fell by 38 per cent, and where observers of the economy say that not enough people outside the country understand the size of the hit it has taken.

Japan has now borne the weight of the world recession twice. The exports kept it going through a decade-and-a-half of poor growth have been hit savagely as consumers everywhere else recoil from spending. And as the world’s biggest creditor nation, its currency has soared as the Japanese bring their currency home – giving everyone else the free kick of an effective devaluation against the yen.

The danger is that if Japan decides the pain is so great it has no choice but a devaluation of its own, then that could set off a chain of competitive devaluations around the main manufacturing and exporting nations – especially in China.

It was China’s competitive devaluation of the yuan in 1994 that helped sow the seeds of the 1997 Asian financial crisis, so the huge impact of these moves by governments should never be underestimated.

Japan is still Australia’s biggest trading partner in both dollar value and the spread of mineral and rural exports, and whatever happens there affects us profoundly. Japan is also one of the places that could send the world economy off on another nasty skid. There is still plenty of room for miss-stepping before those green shoots really start to grow.

Westpac, along with the ANZ, has cut its standard variable home loan rate by 10 basis points (0.10%), in line with a similar move by the Commonwealth Bank of Australia.

Westpac is the last of the Big Four banks to respond to the Reserve Bank’s rate reduction yesterday.

National Australia Bank, stands alone out of the big 4, with it’s decision to not pass on any of the cut to it’s borrowers – leaving its standard variable home loan rate unchanged.

From April 20th, Westpac will charge 5.81% on their standard variable loan. ANZ will have the same rate, effective from April 17.

”Westpac continues to manage the challenging funding conditions with careful consideration of the deteriorating economic environment and the impact on our customers,” Westpac Group Executive, Retail and Business Banking, Peter Hanlon said.

Yesterday, CBA said it would cut its standard variable mortgage rate by 10 basis points to 5.64%, effective April 17.

National Australian Bank has said it would not cut rates because of the high cost of wholesale funding. Its variable rate stays at 5.74%.

The big four have resisted calls from Treasurer Wayne Swan for them to pass the 25 basis-point cut on to customers. Banks that don’t pass on the interest rate cut need “a good kick up the bum”, according to Federal Treasurer – Wayne Swan.

Victoria State Premier John Brumby added his voice to calls for the big banks to pass on cuts in interest rates to borrowers today, saying, “The banks need to do this, there needs to be more competition in the market, and I’m quite disappointed these reductions haven’t been passed on,”.

Prime Minister Kevin Rudd also urged banks to reconsider their decisions.

Moving the lending rate from 5.91% to 5.81% knocks $21 off the average monthly repayment on a $350,000 mortgage over 25 years.

World leaders agreed to inject $1.58 trillion into the global economy in a historic deal to kick-start growth and save jobs.

The leaders of the world’s top 20 economies, including Prime Minister Kevin Rudd, announced the deal at the end of their London summit.

The Real Estate Institute of Victoria welcomed the announcement, saying the spending would help put a floor under property prices. “The property market will benefit from any improvement in economic conditions, particularly if it results in economic growth,” chief executive Enzo Raimondo said.

Chief economist at AMP Capital Investors, Shane Oliver, said the G20 announcement had helped to push the stock market higher for a fourth week.

“While it’s too early to say shares have bottomed, there are certainly positive signs. Further gains are likely over the next few months,” he said.

Mr Rudd called it a concrete plan to beat the effects of the global recession set off by the collapse of banks in the US.

“It’s been prime ministers and presidents who have struck this deal, but it’s small businesses, tradies and young people who will benefit from it over time,” he said.

Mr Rudd said the G20 deal cracked down on “cowboys” who had brought global markets undone. Treasurer Wayne Swan added: “Any measure globally which supports growth and jobs assists the stimulus the Australian Government has put in place to support that.”

Babcock’s downfall was blamed on taking on too much debt – and then being unable to cope in the credit crunch.

At its peak, shares were worth 37 Australian dollars (£17.40; US$24.20) but when suspended about three months ago, were worth just 32.5 cents.

Efforts to avoid administration failed when a group of shareholders rejected a proposed debt restructuring, with Deloitte being appointed as administrators.

Like with Chapter 11 bankruptcy laws in the US, firms entering voluntary administration in Australia can attempt to trade out of financial difficulties.

But administrator David Lombe told the Australian Broadcasting Corporation that it was too early to say whether Babcock could avoid collapse.

While administrators will run the company on behalf of creditors, Babcock said that it would focus on “ensuring that the value of assets and business platforms is preserved during this process and all assets and businesses continue to be managed appropriately”.

Its satellite investment funds, Babcock & Brown Infrastructure – which owns UK port firm PD Ports – said it was unaffected by the administration.

Babcock had been hailed a success, likened to a mini-version of Australia’s most dominant investment bank Macquarie.

Last November, Macquarie announced a sharp fall in profits but said it did not need to raise cash.