The Reserve Bank is poised to take official interest rates below 1 per cent even as evidence grows its previous rate cuts have supercharged the Sydney and Melbourne property markets with values growing eight times faster than inflation.
Economists from all major commercial banks believe the RBA will slice the cash rate to 0.75 per cent when it meets on Tuesday, following up its back-to-back rate cuts in June and July. If passed on in full, such a cut would save $55 a month on a $400,000, 30-year mortgage.
When the bank started cutting rates, there were some concerns that instead of boosting the jobs market, the move could power-up the property market.
CoreLogic’s daily measure of dwelling values suggests that is what has occurred.
Through the first four weeks of September, prices in Sydney were up by 1.6 per cent while in Melbourne they have climbed even more, up by 1.8 per cent.
Over the past three months, which includes the passing on of the June cut in official rates, Sydney and Melbourne dwelling values have jumped by almost 3.5 per cent or by more than 13.5 per cent at an annualised rate. Inflation over the past year has climbed by just 1.6 per cent.
Auction clearance rates have also lifted sharply, well above 70 per cent in both Sydney and Melbourne at the weekend although total properties put up for sale are still well down on the same period last year.
Bank governor Philip Lowe has played down concerns about the lift in dwelling values, saying the RBA is closely watching credit growth which has yet to show signs of strength. Last week, he also noted that the bank had to take into account movements in interest rates in other parts of the world.
If Australia failed to cut rates as other nations did so, this would put upward pressure on the currency.
Westpac chief economist Bill Evans, who believes the RBA will cut rates on Tuesday, said the Reserve was being driven towards easing monetary policy by the jobs market and what was occurring overseas.
He said since cutting rates, the unemployment rate had drifted up to 5.3 per cent as had the national under-employment rate while the global environment – with every major central bank easing monetary policy – had got tougher.
Last week’s speech bolstered the case for a cut by highlighting the global developments that are indicating the need for lower rates, he said.
While markets expect a rate cut on Tuesday, criticism about what it may achieve is growing. Last week former federal treasurer Peter Costello said structural reforms would achieve more for the economy than another reduction in rates.
The left-leaning Australia Institute, in research to be released on Monday, finds there is a growing risk that not all of a rate cut will be passed on to consumers as banks try to protect their bottom lines.
Senior research fellow David Richardson said banks will be loath to pass on another cut in rates and may look to tighter lending criteria to maintain their profit margins.
“Private banks control most of the lending in Australia, in this environment and in order to maintain their interest margins, banks are going to resist reducing lending rates,” he said.
Money floods back into property after back-to-back rate cuts
Banking regulators may have to tighten lending standards sooner than expected amid fresh signs the Reserve Bank of Australia’s back-to-back interest rate cuts have enticed investors back into the property market.
As Prime Minister Scott Morrison said the government and RBA governor Philip Lowe were working together to support the economy through a “complex” period, the Australian Bureau of Statistics reported a sharp lift in home lending through July.
The value of home loans in the month lifted 5.3 per cent, with gains across every state including a 5.4 per cent increase in NSW and a 3.4 per cent improvement in Victoria.
Investor lending excluding refinancing jumped 4.7 per cent, its strongest monthly gain since September 2016. Loans for construction slipped 1.6 per cent but there was a 10.7 per cent jump in those to buy newly built homes.
The increase followed interest rate cuts in June and July by the RBA, which has played down concerns that lower lending rates will reignite the property market.
ANZ economists Adelaide Timbrell and Felicity Emmett said as lending for housing and property prices had increased since the rate cuts, regulators were going to have to consider tightening lending standards.
“The RBA is unlikely to be impressed by these numbers. It would not want a repeat of the housing boom that we had prior to 2017, given already high levels of household debt,” they said.
“It is also conscious of the impact that strongly rising house prices have on inequality. If this sort of growth in housing finance persists, we expect the regulators would begin to consider macro-prudential controls sooner rather than later.”
BIS Oxford Economics economist Maree Kilroy said it appeared investors had reacted positively to the federal election result, interest rate cuts and the easing of lending standards by moving back into the market.
The data follows last week’s national accounts, which showed the economy growing at its slowest rate since the global financial crisis.
At the weekend, Dr Lowe told The Sydney Morning Herald and The Age that while there was limited capacity to do more infrastructure spending in Sydney and Melbourne, there was scope to do significant projects in other parts of the country or boost ongoing maintenance programs.
“Part of infrastructure investment is actually maintaining road, rail, bridges right across the country. It has the other advantage of making sure infrastructure spending is spread across the country and not just centralised in Sydney and Melbourne. There is capacity in some areas,” he said.
But Mr Morrison said the government and Dr Lowe were working together, saying the budget plan for a $100 billion, 10-year infrastructure plan was at the urging of the governor.
“I have been working with the Reserve Bank governor as both the treasurer and prime minister for four years. It is as a result of the Reserve Bank governor years ago, [his] suggestions to us about the need to move on infrastructure, that we have the $100 billion infrastructure pipeline that has been in the budget since April of this year and is featured in previous budgets,” he said.
Interest Rate Hits An All-Time Low: What Does It Mean For The Gold Coast Market?
GLITTER Strip borrowers could have more than $20,000 back in their pockets after the Reserve Bank of Australia cut interest rates to an all-time low of 1.25 per cent.
The cut from 1.5 per cent to the official cash rate was welcomed by Gold Coast heavyweights.
Ray White Surfers Paradise chief executive officer Andrew Bell said the cut alongside the Coalition’s federal election win would create stability in the real estate market.
“It gives people a sense of where the market is going,” he said.
“They now know the government policies for the next three years and they get a sense that interest rates will remain low for some time and these are good signals for the marketplace.
“This is the perfect climate to enact your buying needs.”
The average home loan size is $384,700, according to the Australian Bureau of Statistics (ABS).
Finder.com found the cut could lead to savings of almost $700 per year, or almost $21,000 across a 30 year loan.
CoreLogic head of research Tim Lawless echoed Mr Bell’s sentiments and said it would further boost the property market.
“The move by the RBA to cut rates was widely expected and no doubt the focus will now turn to mortgage rates — how low will they go?,” he said.
“Mortgage rates for owner occupiers are already around the lowest level since the 1960s and lenders are generally expected to pass on most, if not all of the cash rate cut to mortgage interest rates.
“Lower mortgage rates, together with the likelihood of lower borrower serviceability assessments if Australian Prudential Regulation Authority (APRA) delivers on a relaxation to the base serviceability rate later this month, as well as renewed confidence following the federal election, are likely to see an improvement in housing market activity.”
Gold Coast Central Chamber of Commerce president Martin Hall said the cut would allow locals to further enjoy the live, play, work approach of the city.
“Anything that makes the art of doing business easier for small and medium businesses, or any business on the Coast, is welcomed,” he said.
“In the lead up to what will be an interesting state election, focus on business is as important as ever. Now is the time for small businesses to have a big voice.”
The Commonwealth Bank (CBA) and the ANZ were the first of the big four banks to announce reductions to its rates after yesterday’s announcement by the Reserve Bank.
The CBA said it would pass the cut on in full, and the ANZ said it would reduce its variable rates for owner-occupier and investor loans by 0.18 percentage points from June 14.
Homeowners with a $500,0000 mortgage will save an extra $73 a month if their bank passes on the full cut.
Treasurer Josh Frydenberg said the interest rate cut and lower income tax could benefit two-income families to the tune of $3000 a year.
RateCity predict June and then August rate cut
Home loan comparison website RateCity.com.au expects the Reserve Bank to cut rates at the June meeting, and then again as early as August.
RateCity’s research director Sally Tindall said cutting rates was no longer an “if’, but “when” scenario for the RBA.
“Governor Lowe has been extremely hesitant to cut the cash rate, but he’s working against a backdrop of rising unemployment, falling inflation and less than impressive wages growth,” she said.
“If he doesn’t cut tomorrow, he’ll catch much of the nation by surprise.
“The decision seems close to a foregone conclusion. The one thing that could hold him back is the fact that he only has a few trump cards left in his hand before he bottoms out, but he’s made it very clear he’s prepared to play.”
RateCity’s forecast for two cuts would take the official interest rate down to 1 percent.
If the cash rate is cut to 1 percent, owner occupier variable home loan interest rates are set to drop below 3 per cent, while investor rates could fall as low as 3.24 per cent.
“If a rate cut does happen, there will be pressure on the banks to pass it on in full.
“Banks have been hiking rates since 2017 due to the high cost of funding, but this pressure has dissipated, so the next RBA cut should, in theory, be passed on in full.
“That said, it’s been a tough year for the banks in a slowing home loan market, so some lenders may choose to hold part of the cut back,” she said.
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