The Reserve Bank of Australia (RBA) has today announced a 0.25% rate cut, taking the official cash rate down to an unprecedented low of 0.25%.
What’s behind the rate cut?
The latest interest rate cut is designed to stimulate the economy and limit the economic fallout of the Coronavirus (Covid-19) outbreak. Markets don’t like uncertainty and these are uncertain times. The RBA has made this rate cut to minimise the uncertainty factor as much as possible.
Lower interest rates, coupled with quantitative easing measures, have two aims: It encourages Australians to spend, which is good for the economy, and it reduces the cost of government stimulus packages.
What does it mean for you as a home owner or investor?
Different investment classes will be impacted by lower rates in a variety of ways.
Returns on cash savings have already been very low for some time. The latest rate cut has made cash-based investments even less attractive to investors – more so because returns on cash are fully taxable.
Residential property values have been steadily rising and we can’t see this situation changing with today’s rate announcement, especially with home loan interest rates at all-time lows.
Also, with share markets stumbling, investors could put more money into residential property to further support market demand. Understandably, many investors will see residential property as a far less volatile alternative than shares.
Demand for quality commercial assets is still very strong – both among owner occupiers, self-managed super funds (SMSFs) and investors.
A lot of this demand is being driven by sharemarket volatility (investors) and ultra-low interest rates (owner occupiers and SMSFs). While a slowdown in the economy will impact the business sector – and potentially commercial property, this could provide valuable opportunities as it may bring more properties to the market, which in many areas is characterised by extreme shortages of stock.
What should you do?
The first step is to remember that the Coronavirus crisis will pass. History shows that asset markets have always recovered over time.
If you are working towards long term goals, there may be no need to adjust those plans – and indeed, today’s super low rates offer valuable savings for borrowers.
The key is to talk to your local Raine & Horne office for expert advice on the market in your location, and to know the steps you can talk to start achieving your property goals.