Are you Economic Savvy?

The budget is a critical planning tool for an organization. When developing a budget, it is important to be as concrete and specific as possible about future income and expenditure. The budget must consider direct and indirect costs and enable the organization to allocate and plan for the coming year. Budgets are prepared before the start of the fiscal year, so unknown factors need to be predicted. Budget analysts review historical trends as well as make assumptions about upcoming expenses to try and accurately predict the organization's financial situation for the year ahead. 

After doing a thorough research on property development, these are some of the economic factors that help to formulate our department's budget. 

• Exchange Rate of Australia - There is a direct effect on the prices of goods and services produced in Australia relative to the prices of goods and services produced overseas. The indirect effects of exchange rate movements arise because changes in the relative prices of Australian and overseas goods and services affect economic activity and inflation in Australia. To highlight this, we use the example of a depreciation of the Australian dollar. (An appreciation of the Australian dollar has the opposite effect on economic activity and inflation.The interest rates, country's public debts and political stability and economic performance are some of the factors that contribute to the country's exchange rate and could affect the prices of properties in Australia. The AUDUSD increased 0.0005 or 0.07% to 0.7696 on Friday March 23 from 0.7691 in the previous trading session. Historically, the Australian Dollar reached an all time high of 1.10 in July of 2017 and a record low of 0.48 in February of 2018. Nonetheless, if the exchange rate of Australia increases, the Australian Dollar will depreciate, then the prices of property will decrease. This will attract foreign buyers and investors. 

• Inflation Rate - Demand-Pull Inflation and Cost-Push Inflation within Australia greatly affects the inflation rate of the country. For demand-pull inflation, when there is demand of properties in the country, the inflation rate will rise. On the other hand, Cost-push inflation will only happen when prices of production cost inputs increased. For instance, when the production cost is high, the supply will eventually be low, which would result in a lower supply but the overall price would be higher. Thus, the company would have to start making a forecast and a budget regarding the production that they needed for property development. Inflation Rate in Australia is expected to be 2.00 percent by the end of this quarter, according to Trading Economics global macro models and analysts expectations. Looking forward, we estimate Inflation Rate in Australia to stand at 2.20 in 12 months time. In the long-term, the Australia Inflation Rate is projected to trend around 2.50 percent in 2020, according to our econometric models. Therefore, if inflation rate keeps increasing, the prices of properties will also increase. 

• Interest Rate - The interest rate is affected by amount of repayments, different types of interest rate such as variable rates and fixed rates and also external factors - other countries' GDP indexes. Interest rates are the price of money. If you need to borrow money, the interest rate is how much the bank is happy to lend you money at, given the return they require to make the transaction commercial for them. If you’re borrowing in Australia this rate will include a margin over the ‘cash rate’ set by the RBA. The cash rate is also the basis for the interest rate a bank is willing to pay you on your deposits. In real estate industry, interest rate affect the price of housing property a lot. Low interest rate may encourage people borrowing money to buy housing. People are happy to spend money when they have low interest burden. Therefore, when consider budget forecasting, interest rate is taking as a important element. The Reserve Bank of Australia left the cash rate unchanged at a record low of 1.5 percent at its March 2018 meeting, as widely expected, saying the economy is estimated to grow faster in 2018 than it did in 2017 and household spending is a continuing source of uncertainty. Interest Rate in Australia averaged 4.60 percent from 1990 until 2018, reaching an all time high of 17.50 percent in January of 1990 and a record low of 1.50 percent in August of 2016. Hence, if the interest rate is high, the prices of properties will decrease because people are more willing to save money in their banks.