In a move that surprised very few experts, the Reserve Bank of Australia (RBA) left official interest rates on hold at 3.5% in July. In explaining the decision, RBA Governor Glenn Stevens pointed to better than anticipated domestic growth, coupled with low inflation and some signs of stability in Europe.

To illustrate this point, Australia’s retail sales outpaced expectations in May on the back of lower interest rates and government tax breaks. Sales rose 0.5% in May to A$21.3 billion, according to a report from Reuters. This was a solid result, given most authorities expected an increase closer to 0.2%.

“Based on the latest numbers it looks like the stimulus applied to the domestic economy is starting to work,” Michael Blythe, Chief Economist at Commonwealth Bank told Reuters. Similarly, sales of new vehicles in Australia rose 17.1% in June, compared with the same month last year, with SUV’s up no less than 46.6%.

While retail sales have started to show some improvements, Angus Raine, CEO of Raine & Horne, says the real estate market is also set to enjoy the benefits of improved consumer sentiment. “There are indications that the housing cycle may have turned, particularly given that interest rates are now at below average levels and building approvals are up.”

Consequently, Matthew Hassan, Senior Economist at Westpac, says, “Dwelling approvals registered an extraordinary spike in May with a 27.3% jump taking total approvals to their highest level since January last year.” However, to be fair, Mr Hassan said this result could be a one off. That said, a Property Observer report on the state of the real estate market suggests there are a number of standout markets according to researcher Residex. For example, in Darwin, house prices rose 3% in May, while they jumped 2% in Sydney to a median price of $675,500. Meanwhile, Perth units climbed 8% over the three months to May 2012, according to the same report. Residex

CEO John Edwards told Property Observer that the Australia-wide May results were pleasing, saying the trend shows that “markets have clearly moved to the positive and adjustments are now occurring at a lower rate.” Furthermore, Real Estate Institute of Australia (REIA) President, Pamela Bennett, while applauding the impact of interest rate cuts and improved real estate data, conceded there was still work for governments to do. “There are a number of other measures we need to take into account before we can call it a change in direction,” says Ms Bennett, who wants to see more done to resolve issues holding back first time buyers such as inefficient state taxes, excessive red tape and land-release delays.

“Interest rates are an important consideration when deciding whether to rent or to buy, but there are still a host of other barriers for first home buyers that need to be overcome too. We can’t expect all the work to be done by the RBA,” says Ms Bennett.

R&H Terraine - August 2012 Snaphot

RBA Leaves Rates On Hold As Positive Domestic Growth Indicates A Possible Housing Recovery