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RP Data - What impact will the RBA cust have on housing?
What impact will this month’s interest rate cut have
on the housing market?
At its December Board Meeting the Reserve Bank (RBA) decided to cut official
interest rates by 25 basis points for the second month in succession. This week
we take a look at the likely impact on the housing market.
The Reserve Bank decided to cut official interest rates this week by 25 basis
points taking the cash rate to 4.25%. This was the second successive month in
which interest rates had been reduced. This is the first time since February and
March 2010 that we have seen successive interest rate changes, and the first
time since January and February 2009 there has been successive rate cuts.
As at the end of November, the average standard variable mortgage rate was
7.55% and the average 3 year fixed rate was 6.4%. It remains to be seen whether
the whole 25 basis point cut will be passed on. If it is, standard variable
mortgage rates will revert to decade average levels. If 3 year fixed rates
remain unchanged they will be 66 basis points below the decade average.
From a housing market perspective, the big question will be: Will the
successive rate cuts help to stimulate activity in the housing market?
Undoubtedly interest rate cuts improve housing affordability. In stating
this, capital city property values have fallen by -4.0% over the 12 months to
October 2011 and rental rates have risen by 4.6% which also improves
As the second graph shows, in the past changes to standard variable mortgage
rates have generally encouraged greater property value growth. On the other
hand, interest rate increases have tended to result in lower levels of value
The third graph highlights the relationship between standard variable
mortgage rates and consumer sentiment. Much like property value growth, higher
interest rates have often resulted in lower levels of consumer confidence and
Although history can be a guide to the future, we feel that conditions are
somewhat different this time round. Property values are higher than they have
ever been before and although interest rate cuts and value falls help boost
affordability, it remains much more affordable to rent than it is to purchase.
A raft of other economic indicators also suggest that market conditions may
be somewhat different than they have been in the past. Retail trade has grown by
just 3.4% over the 12 months to October 2011 which is well below the decade
average growth of 5.4% annually. GDP Data released for the September 2011
quarter this week shows that the Australian economy expanded by 2.5% over the
year compared to an average expansion of 3.0% annually over the past decade. The
data also showed that households continue to save around 10% of their income
which is at levels not seen since the since the mid 1980’s. The total value of
housingfinance commitments have grown by just 4.1% over the 12 months to
September and have fallen by -1.3% when refinances are removed. These figures
are well below the respective decade averages of 9.4% and 8.9%.
Considering that European Governments are currently experiencing a debt
crisis, not to mention the ongoing weakness of the US economy, things are
certainly not looking as strong as they have over much of the past 10 years.
Given these conditions, it would seem unlikely that even if the Australian
economy continues to perform comparatively strongly that credit for housing will
be as freely available as it has been in the past.
So the initial question was what impact will the interest rate cut have on
the housing market?
If the interest rates cut is passed on it will provide a much needed hand to
those home owners under mortgage stress. It would also potentially encourage
some more sales transaction activity however, this is unlikely to filter through
until after January next year as December and January are typically the quietest
months for housing market activity. An interest rate cut would also likely
provide some support to consumer confidence levels.
On the other hand, given the overall economic conditions we don’t believe
that two 25 basis point cuts to interest rates will provide enough stimulus to
result in any significant turnaround in property value growth. We suspect that
consumers will remain cautious and continue to pay down their debt, housing
finance is unlikely to be flowing as freely as it has in the past and consumers
will be aware that the RBA won’t be afraid to lift interest rates rapidly again
should the economic outlook improve.
Given this, if the cut is passed on it would likely provide welcome relief to
home owners and may encourage some increase in sales activity next year however,
it is unlikely to provide a stimulant for property values to once again start
increasing given the broader economic conditions.