Joe says borrow, but should you?

JOE Hockey says now is the time to borrow, borrow, borrow. But with concerns of a property bubble, investors are hearing mixed messages.

Joe Hockey

TREASURER Joe Hockey is urging Australians to borrow and invest in the Australian economy in the wake of yesterday’s historic interest rate cut by the RBA.

The 25 basis point cut to 2.0 per cent brings the official cash rate to its lowest level ever, and will push mortgage rates down to levels not seen since the 1950s.

It’s good news for homeowners and those with personal debt, but very bad for self-funded retirees who rely on income from bank deposits — and just plain confusing for everyday investors wondering what to do with their money.

In a note following the decision, AMP Capital chief economist Dr Shane Oliver said investors would have to accept the reality of low interest rates.

“Falling interest and deposit rates mean that growth assets providing decent yields will remain attractive,” he said. “This includes commercial property and infrastructure but also Australian shares which continue to offer much higher income yields than bank term deposits.”

Despite bank deposits becoming virtually worthless as a place to store money, many are wary of the lure of investing in an overheated property market. And for first home buyers — in Sydney at least — things are only going to get harder.

Justine Davies, finance expert with Canstar, said any benefits of lower rates for first home buyers were generally negated by the increase in property prices.

“It’s tricky. It’s really a catch 22,” she said. “What we’ve seen with the last few rate cuts is property prices have tended to absorb that affordability benefit, and in many ways it makes it harder to get into the market.

“If you’re taking out a bigger mortgage upfront, when rates do go up in the future you’re going to end up paying it off for longer. But for the people who already have a mortgage, particularly a big one, this is a generational opportunity to pay off a big chunk before rates go up in future.”

The most important thing is for investors to not take on any greater risk than they otherwise would have,” she said. “Today deposit rates may not be great, but if you’re not comfortable with the risk associated with shares or property it’s not a good idea.”

Blue-chip shares that pay a good dividend can be a good source of income, she said, although a massive sell-off in Commonwealth Bank shares today may raise questions about that strategy.

In the past three years low interest rates have forced conservative investors to ditch term deposits for the bank’s reliable dividend yields.

But CMC Markets chief market strategist Michael McCarthy said CBA’s share price fall put that investment thesis into question and warned further falls were likely.

“As a lot of people are finding out, when a stock can drop 13 per cent, the dividend does not offset that loss,” he told AAP.

Alexis Gray, investment analyst with Vanguard, warned against being too eager to heed Joe Hockey’s advice. “I would be cautious with that,” she said. “It really depends on where you sit. Household debt in Australia is one of the highest in the world, and I think it’s prudent not to over-leverage at this point.”

Ms Gray said individual asset choice was less important than the overall mix. “Take a step back and say what’s the ultimate goal? How much money do you need and when do you need it? It’s about the time horizon you have.”

Property and stocks are drifting above their long-term average valuation, which tends to be an early warning sign of a correction, she said.

“There is a natural cycle. The most important thing is having balance and perspective. There is a role for defensive assets like cash and fixed income deposits to play a role, and that’s to provide a buffer when riskier assets fluctuate.

“Ultimately you have to be comfortable to live through a correction, and if you’re not comfortable, don’t do it.”

– with AAP

Originally published as Joe says borrow, but should you?