Will the RBA Hold Interest Rates to Deter Auction Surges?

It’s no secret that interest rates affect the housing market. When rates go down, property becomes more affordable. It’s not that prices dip, but, rather, mortgages become cheaper. Yet strict regulation is still seeking to push buyers out of the market.

APRA, the Australian banking regulator, began to significantly tighten home loan lending in 2014. Effectively, the eligibility for a mortgage has become tougher. These regulations have been the catalyst for borrowers to be rejected on their applications.

It’s not that these were bad borrowers to begin with. They had received pre-approval. Instead, they’ve been given the cold shoulder by banks. Either they need to come up with bigger deposits, or they need to forgo their dreams of owning property.

But if the Reserve Bank of Australia (RBA) drops rates on Tuesday, will housing prices surge?

A Sydney Morning Herald article highlighted strong Sydney auction results. According to CoreLogic, the city had an 80.4% preliminary clearance rate recorded from nearly 500 auctions on the weekend. This means that around 402 houses, out of the 500 on sale, were sold at auction.

It’s not uncommon for houses to be sold at auction. However, the property market is considered ‘hot’ when this clearance rate goes above 72%.

Buyers are not just limiting themselves to Sydney, either.  In the week from 4 to 11 July, capital cities had an average auction clearance rate of 72%. Sydney was a clear winner (79%), with Adelaide (72.3%) and Melbourne (71.9%) close behind.

So if the RBA wants to hold back the ‘hot’ property market, they should just hike rates tomorrow, right?

The RBA’s Interest Rate Decision

It’s not as simple as this. There are many factors that go into property prices. Affordability is definitely a factor. But a reason why a lot of people buy property is because there is a high demand for it.

You already have people wanting to own their own homes — ‘The Australian Dream’. And you also have investors who are eager to make money out of this lucrative asset class. Now, which buyer do you think is more prevalent in the market?

It is owner-occupiers, of course. And this is why property prices can climb so high. Many investors would never pay extremely high prices for property, because it would eliminate all of their gains.

However, an owner-occupier might fall in love with a property they’re looking at. And this emotion is what encourages them to bid more than the house is really worth.

Australia’s population is also increasing. There are ever more buyers in the market who are demanding homes near CBDs.

Wouldn’t you expect property prices to increase?

Yet this is not the picture the media presents about the Aussie property market. Instead they focus on the young 20-something property owner, in way over their heads. They’ve been lent an abnormal amount of money and they have no way of paying off their debts.

Of course, these types of cases are out there. But the RBA won’t likely hike rates just because of the ‘hot’ property market. Rather, they may lower rates because of the rising Aussie dollar.

The AUD has climbed above 76 US cents. The 1.34% AUD climb was due to US GDP figures coming in far weaker than expected. The Aussie dollar is now 4.6% higher than it opened this year. And Australia’s export attractiveness might be far more important when the RBA makes their decision.

But, hypothetically, if rates do rise on Tuesday (highly unlikely), what will happen to property prices?

Aussie property has already shrugged off the doomsday preachers. I don’t see the property market being affected too much. And while affordability might force some investors to save an extra year, the market will always have its buyers.

Härje Ronngard,

Junior Analyst, Money Morning

PS: Most people think great deals in Aussie property are already all gone. This is the worst attitude to have. Why would you take financial advice from some self-proclaimed guru? Instead, why not do your own research. Take control of your financial future. But where do you start?

If you’re interested in investing in property, check out Money Morning’s property expert Callum Newman’s report ‘Australian Real Estate Game Plan’. In the report, Callum reveals the eight letter word that really drives property values. It’s the ultimate guide to help you start your future property plan, and it’s free!

To get your copy of Callum’s report, click here.

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia