Interest Rates Steady at 2% but is There a Cut to Come?

There was no pre-Christmas gift for consumers from the Reserve Bank this month with the board keeping interest rates steady at 2% for yet another month.

In what seemed a sure Melbourne Cup Day bet, economist predicted the RBA would make no move to change the official cash rate at this month’s board meeting.

The decision follows a move by the big four banks to raise interest rates independently of the RBA last month and as data shows signs of cooling in the housing market.

In his statement, RBA Governor Glenn Stevens says: “The Board judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate at this meeting.

“Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.”

Stevens says regulatory measures have led to an easing in growth in lending to investors, while owner-occupier loans appear to be picking up slightly.

Borrowers Beware

While the RBA held rates steady for another month, finder.com.au Money Expert Michelle Hutchison says this no longer means certainty for borrowers due to the possibility of our-of-cycle rate increases from the banks.

“While a rate hold would usually mean mortgage repayments would remain steady, a recent rush of lenders announcing rate hikes means borrowers can expect to pay an extra $32 per month on a $300,000 loan,” she says.

“Since Westpac’s announcement last month, we’ve seen a total of eight banks follow by announcing rate rises. The latest is AMP, which yesterday announced it will increase rates on variable owner-occupied loans by 0.18 percent.”

Hutchison says while some experts believe another rate cut could be on the cards as early as next month, in the long term rates are only likely to go one way – up.

“With rate rises coming into effect later this month, impacting the majority of homeowners in Australia, borrowers have to keep on top of their provider’s rates, by reading the fine print and asking questions regarding their loan.

“In a time of uncertainty and change, and with Christmas just over seven weeks away, you don’t want to overlook the fine details – even a small increase to your interest rate can cost you hundreds, or thousands, of dollars per year.

Housing Industry Association chief economist Dr Harley Dale says any rate cut by the RBA this month may not have been passed on by the banks in what would have been a “double hit” to mortgage holders after the banks raised rates independently of the Reserve.

“It is dangerous timing for the economy to be undergoing a wide-sweeping rationing of credit to investors followed up by an increase in variable mortgage rates,” he says.

“This combined action hits the housing market more heavily than any other industry, yet new home construction has been the key direct and indirect driver of domestic economic activity in recent years.

“Any further interest rate reduction by the RBA – which seems less likely post their November decision – would need to be timed and communicated to ensure it mitigated rather than exacerbated the adverse impact of a tighter financing environment.”

Capital Gains Easing

CoreLogic RP Data’s Hedonic Home Value Index for October points towards a cooling housing market, with an easing in the rate of capital gains in Australia’s two biggest housing markets – Sydney and Melbourne.

The two major markets both recorded modest increases in home values for the month, with Melbourne rising 0.6% and Sydney 0.3%. Adelaide and Canberra recorded the strongest growth in October with values rising 1.5% in both markets, while Perth experienced the biggest drop of at -2.8% value growth.

CoreLogic RP Data head of research Tim Lawless says there are a number of factors contributing to the slowdown.

“It’s not just the fact that mortgage rates have recently risen outside of any lift in the cash rate. We are also seeing approximately a 30% premium on investment related mortgage rates, tighter lending standards and borrowers generally requiring a larger deposit,” he says.

“Gross rental yields at record lows and affordability constraints are acting as a further disincentive, particularly in Sydney where the median unit price is equal to, or higher than the median house price in every other capital city. Additionally, new housing supply is moving through record levels which should help to ease the upwards trajectory of home values.

Lawless says a downturn in the mining and resources sector is having a ripple effect on the Perth and Darwin economies and contributing to the slowdown in the housing markets.

Capital expenditure relating to the mining and resources sector has fallen substantially which means tougher labour conditions and little in the way of migration which has previously fueled housing demand in these areas,” he says.

What the Rate Decision Means for You

Lawless says the RBA’s decision likely means they’re happy with recent data from the housing sector showing an easing in capital gains while housing approvals remain strong.

He says investor activity has settled, with the APRA regulations having the required effect on that segment of the market.

“While it is still early in this part of the cycle, the slowdown in housing market conditions is taking place at a controlled pace; the last thing the RBA would want to see is a sudden deterioration in housing market conditions or a return to the strong growth conditions that have been evident across Sydney and Melbourne over the past three and a half years,” Lawless says.

“The recent out-of-cycle increase in mortgage rates will likely provide the RBA with some additional wiggle room when it comes to considering a rate cut either later this year or early next year.

“If we do see official interest rates fall over coming months, there is a high likelihood that the full cut won’t be passed on to borrowers, considering the higher capital requirements placed on residential mortgages by the prudential regulator, APRA.”

State and Territory Housing Markets

Change in dwelling values across Australia’s capital cities. Listed as city, monthly change, quarterly charge and year-on-year change.

Lower auction clearance rates, a slowing of mortgage-related activity and record levels of new housing supply on the market have all conspired to slow the Australian housing market.

“We are also seeing listing numbers move higher than a year ago in Sydney. This is the first time our data has shown housing stock levels to be higher compared with the same period a year prior since mid-2012. Higher levels of housing stock means more choice for buyers which should ultimately result in some rebalancing towards buyers over sellers when it comes to negotiating on price,” Lawless says.

“If the trend towards higher stock levels persists, we can expect Sydney buyers to face less urgency when it comes to making their purchase decision around property and higher discounting rates from vendors as they face more competition in the market.”

Information supplied by www.realestate.com.au