The market has seen some extraordinary things happen in the last few months, record prices, and record demand have fuelled a resurgent market with clearance rates in Australia's capital cities hitting an all time high. But will we see further cuts like we have seen in recent months? We don't believe so, and here's why:
1. The RBA needs to measure the effect of recent actions: It's all good and well implementing further cuts, but the RBA needs to sit back and monitor the response of what these cuts are doing to the market. Implementing changes without monitoring the effect is dangerous, as the market can be responding without the RBA taking note, with a change happening to drastically the other way.
2. Cutting rates is only a temporary fix to the problem: Cutting rates hasn't fixed many of the core issues fuelling the weak economy in Australia. It doesn't seem to have decreased unemployment, and as JP Morgan chief economist Stephen Walters states "We think the core problem is the lack of productivity, the dysfunction in government, lack of clarity on budget, short-termism around state governments and all the things that the cash rate going down doesn't really help."
3. There is enough demand and confidence in the real estate market: One of the key indicators in cutting rates is the rate in which people are buying assets. There clearly is no concern with the Australian public snapping up real estate at record rates and at record prices. A cut will only make money more readily available, at a cheaper rate and fuel more investment, which has been criticised to be getting out of hand. A further rate could have property prices sky rocket again creating unprecedented demand, unmatched with supply.
4. The talk of bursting bubbles will take over: Think of it this way, there is only so much you can fill something up before it bursts to create a cataclysmic mess. If the 'bubble' continues to grow, there is a strong chance that when the RBA does eventually hold or even increase rates, it generates a fire sale, strongly implicating the market with an over-supply of properties. Whilst demand is hot, and people should by within their means, a lot don't anticipate or prepare for increasing rate rises and may be forced to sell with increased rates. Cutting rates again will further lull people in to a security thinking money is cheap, with them not entirely prepared when interest rate prices increase.
5. Banks are starting to supply loans on a 2% contingency basis: The banks are already getting nervous with loans being provided at records rates. The bank needs security that they will get their money if rates increase, and have already started. The Australian Prudential and Regulation Authority (APRA) informed banks and authorised lending institutions that assessments of prospective loans “should include an interest rate buffer of at least two percentage points above the standard variable rate... with a floor assessment rate of at least 7%”. With systems being set up for increased rates, cuts don't seem likely.
6. Cuts are only fuelling investment and decreasing owner-occupiers: The RBA wants to do as much as it can to increase people realising the dream of owning their own home. Currently, their actions in cutting rates is fuelling investor demand and decreasing owner-occupied investments. Owner-occupier loans are decreasing, whilst investor loans are hitting record highs. It is creating a huge amount of investors buying properties with negative gearing advantages on offer, with home owners pushing back in to the rental market.
7. House to debt ratio is at an all time high, any further is dangerous: Currently the debt in a family home is at 140% of income, meaning that people are so severely geared with their mortgages that they have little room to breathe. Any cut at this stage would seem irresponsible, as it sends the message people can keep buying in debt with no consequences, the side effects people would suffer from another rate cut, could mean people can't afford their mortgages and supply increases at a rapid rate.
Whilst there are economists out there tipping rate cuts, we like to stay on the side of caution, and believe keeping rates on hold will have a better long term effect on the economy.
Do you agree? Let us know below.
About the Author:
Todd Schulberg handles all things marketing for Homely.com.au - Living and breathing property, Todd has a keen interest in the movements in the market and how agents can utilise new tools and technology in order to be more connected. Using all things social, Todd suggests different ways that agents can engage and think outside the square with their marketing approach.