RBA Cuts Interest Rate To 2.25% - Effect on Property Market

WITH interest rates moving for the first time in 18 months, many households across Australia are celebrating.

Those with mortgages are cheering at the thought of extra money in their pockets every month. Someone with a $500,000 mortgage can expect to save $73 a month from the 25 basis points cut announced by the Reserve Bank this week.

Commonwealth Bank, Westpac and a number of other lenders including ING Direct, ME Bank and Bank of Queensland have passed on the cut in full (and more, in Westpac’s case).

The rate cut is also expected to give the Australian economy a boost, with businesses encouraged to hire more staff and with consumers encouraged to spend more money.

But before you go popping those champagne corks — because, after all, you can afford proper champagne now — there are downsides to the rate cut. The Reserve Bank does not giveth for no reason.

THE PROPERTY MARKET

Growth in various property markets around the country have slowed down in recent months, with the exception of Sydney. With unaffordability levels skyrocketing in the main metro markets, home ownership has become more and more unattainable for Australians, especially young people looking to break into the market.

An interest rate cut may very well fuel the property market as prospective buyers decide they can afford to borrow more money on the lower rates. This is in turn, can push prices as up as buyers bring their bigger kitty to auctions.

However, AMP Capital chief economist Shane Oliver said the effect on the property market isn’t a sure thing. “The RBA and Australian Prudential Regulation Authority have been trying to slow the property market down. The RBA is hoping it can cut rates without putting more steam back in the property market.”

Mr Oliver said the RBA and APRA have taken measures to rein in the property market, such as tightening borrowing terms. He said that even if demand for mortgages go up, supply may not rise as banks are more cautious about who they lend money to.

EAGER BEAVERS

Headlines screaming about historic low interest rates are sure to pique the interest of those looking to take out loans, especially for those who think they can afford to borrow more money than they previous could.

But there is a great risk in borrowers who don’t account for what happens when rates inevitably rise again.

Mozo director Kirsty Lamont warned: “Although it’s tempting to jump headlong into the property market or borrow at high levels when rates are low, you have to put it into perspective and ask yourself whether you’ll still be able to afford the loan when rates inevitably rise again. A home loan needs to be affordable over the long term and fit in with your other financial commitments.”

“When you look back at four years ago, the average home loan rate was 7.32%. It’s now heading down to 5.00% as lenders pass through the latest cut. That’s a big difference in four years.

If you take out a new loan, make sure you’ll be able to make those repayments when rates rise again. Source: News Limited

“If rates rise to the 7% level again, borrowers would have to find an extra $400 each month to cover their repayments on a typical $300,000 loan. That could have a huge impact on the household budget.”

UNCERTAINTY

The reason the central bank has moved to cut the official cash rate is because the Australian economy is sluggish.

In his statement yesterday, RBA governor Glenn Stevens said available economic information suggests that growth is continuing at a “below-trend” pace with domestic demand growth “quite weak”. He also pointed out that the unemployment rate has moved higher while the decline in terms of trade, such as the fall in commodity prices, has led to a reduction in income growth.

The consumer price index has also recorded its lowest increase for several years.

Mr Oliver said that everyday consumers may start to wonder about the state of the Australian economy and the rate cut could create uncertainty on that front.

*News lifted from News Limited & NEWS.com.au