By Roger Ward

Cairns Mortgage Brokers

With the prospect of a protracted period of low interest rates, we consider the other market forces in play to potentially create a once in a life time economic boom unparalleled in any large regional economy in Australia. 

Considering the interest rate environment, Westpac economics in its latest update has interest rates staying unchanged to Sept 2015. Currently the RBA cash rate is at a record low of 2.5% and only expected to increase by 0.5% to Dec 2015. These interest rate levels are historically low and expected to stay that way with a growth momentum in the economy at a woeful low of 2% and to continue at below trend 3% in 2015. 

This low interest rate environment in the context of a Storm is the large low pressure system enveloping the economy. Interestingly, monetary policy is dealt out on a national level and simply used to motivate the economy as a single entity. On course there are micro economies within the nation which can move independently of the national trends, as seen in the recent housing boom in Sydney and Melbourne. These anomalies have raised a level of concern at the Reserve Bank. 

With growth in the economy noted as below trend, its unlikely interest rates will be increasing soon as localised asset value increases cannot be remedied with monetary policy as it would quash growth in the greater economy. 

Here enters Cairns and its $8 Billion dollar capital injection from the Aquis resort. To put this in context, such large capital expenditures in regional areas really don’t have any comparison except for the mining industry. The difference of course is the benefits to the community on completion with thousands of extra tourists per week and the tourism infrastructure needed to manage this. For those economic tragics out there, your assessment of the multiplier effect on such a large construction spend will surely not only have an effect on the local economy but also translate to much needed growth for the State of Queensland.

Some economists estimate one of the most evident changes in the local economy will be the expected population increase of up to 90,000 persons. This figure is made up of the workers and families drawn to the area to build and manage the Aquis development and then service the ongoing tourism needs on completion. According to the 2013 census, this would account for a near 60% increase in the population.

In concert with this population increase, add the credit growth in the investor sector which is currently running at 10%. In regional economies, especially Cairns, investor participation fills a disproportionate part of the real estate economy due to the interest from interstate buyers. A further compounding of the investor demand comes from the two main drivers effecting investors which are the better capital gains and rental return offered by Queensland properties and the ever growing SMSF investor base. 

Placing these factors into play, the low interest rate environment providing cheap funds, the hyper stimulus from the Aquis development, the Cairns micro economy is expected to experience rapid change. From a banking perspective I would expect those changes to include the following key areas. 

1. An immediate shortage of commercial space – The interesting part of this equation will be the Aquis developments own commercial needs taking up space within the area prior to the start date. Add to this the needs of those who are involved in the building and later servicing of the tourism dollar. Commercial property should experience prolonged demand requiring new developments and also rising costs for space. 

2. Exponential increases in demand for residential housing – Housing this major increase in population will be compounded by the supply shortages in the market. The Beaches area of Cairns is expected to see the most aggressive response to the demand as the supply options in this area are limited and it is also closest to the Aquis development. No area in Cairns is to be unaffected with universal increases in assets values expected. This will bring welcome relief to home owners in the area whose asset values have decreased 40-60% since the GFC, especially hard felt in the apartment market. 

3. Vacancy rate to remain very low – The REIQ estimate vacancy rates in Cairns to be around 2% which is critically low. Population growth should have an immediate effect on the rental market. This has been seen before on a smaller scale recently when the mining boom sent the top end of the rental market to new heights. This time the changes will be felt much more broadly with all sectors of the rental market to experience demand led increases.

4. A profound and ongoing benefit to the community – The interesting part to the Aquis development is its legacy of substantial increases in the tourism market on completion. It follows that such major infrastructure developments translate to more investment in ancillary infrastructure like roads, healthcare, education, local government services and a host of services to meet the demand of the tourism market and the domestic market.  The outcome of spending that amount of money in such a small area is something that should benefit all in the community and for generations to come. 

5. Complimentary development synergies - developments on the scale of Aquis have the effect of attracting even more developments to the area. From economies like the Gold Coast or Las Vegas, it’s demonstrated that keystone developments like Aquis encourage other players into the market providing more accommodation options for tourists and permanent residents, employment opportunities and the eventual dilution of the regions over exposure to 1 large development. 

Looking ahead we are keeping an eye on the countries finance sector. With rapid changes in a regional economy it’s important to understand that the finance sector needs to be encouraged to keep pace with the Regional, State and National needs to provide finance in these areas. Our main concern for the finance sector is in two areas.

Firstly, the mortgage insurance industry. Mortgage insurers are organisations who underwrite the risk associated with bank lending more than 80% of the value of a security and the premium is covered by the borrower. 

Mortgage insurers are at the front line when determining risk in the housing economy. They make or break areas and in the worst case scenario, offer no cover for institutions thus all borrowers need a 20% deposit to buy real estate. 

The 2nd risk here is the RBA’s hint they are prepared to use Macro Prudential policies to curb investor demand. Other economies have utilised these type of Macro Prudential policies to cap the demand in the housing sector and it is being threatened by the RBA. As previously stated, investor demand is over represented in regional areas like Cairns and a broad change in lending standards to curb investors will significantly affect the potential of regional areas like Cairns. Simply put, the RBA may kill off investment in regional areas like cairns to allay its fears of a housing bubble in Sydney and Melbourne. 

On that note, I previously felt this was unlikely however with the latest RBA comments on the matter and the Senate Economics Committee concerns, I feel that the next move by the RBA could be the most significant headwind to regional Australian development and specifically undermine the Cairns Regions ability build new dwellings and thrive off the Aquis development. 

One further major benefit to this development which assures local market sustainability is the tourism generated once the development is complete.  Unlike the mining sector, tourism developments of this size will have decade’s long futures with the redevelopment of these sites providing a second wave of investment. 

Cairns residents, hang onto you hats as this looks to be an economic boom bigger than any other if the RBA doesn’t get in the way.