The Rate Drop Likely Won’t Affect the Property Market

Yesterday, the Reserve Bank of Australia (RBA) cut the cash rate from 1.75% to 1.50%. Yet it didn’t come as a surprise to many. Market commentators and analysts were ready for a cut. And they really didn’t seem fazed when it happened.

Before the decision, Bloomberg polled various economists on their thoughts about what would happen. Unsurprisingly, a majority of economists were tipping the 0.25% cut.

It’s also probably no coincidence that preceding market data forced the RBA’s hand. Advanced US quarterly gross domestic product (GDP) figures were announced on 29 July — and they were way off, to say the least.

Quarterly GDP growth came in at 1.2%, when it was originally forecasted at 2.6%. The news sent the US dollar down. And it put upward pressure the AUD/USD exchange. US GDP figures might likely have been a contributing factor to the RBA’s decision.

However, RBA governor Glenn Stevens’ speech focused more on trading partners.

The global economy is continuing to grow, at a lower than average pace. Several advanced economies have recorded improved conditions over the past year, but conditions have become more difficult for a number of emerging market economies,’ Stevens said.

That’s probably not news to you. There has been constant talk of China’s slowing economy. Heading into the future, it’s arguably one of the most important points facing the global economy. Heck, we even named the time we are living in ‘the Asian century’.

They were supposed to propel us into a new, exciting future. One filled with growth and prosperity. I guess it’s probably too early to call it. But there are real concerns whether China can actually take on the challenge.

The action by Chinese policymakers is supporting near term growth. Housing and infrastructure seem to be cushioning the slowdown of their financial services. Yet ‘the underlying pace of China’s growth appears to be moderating,’ according to Stevens. ‘Commodity prices are above recent lows, but this follows very substantial declines over the past couple of years. Australia’s terms of trade remain much lower than they had been in recent years.

Judging from the above passages, trade and other trading partners could have been the catalyst for the cut. Stevens did also mention that Australia’s financial markets remained effectively functional. Funding costs for high-quality borrowers remains low. And monetary policy remains ‘remarkably accommodative,’ Stevens said.

Maybe I’m reading it a different way. But it sounds to me like Stevens is negating the ‘property bubble’ mania. The misguided fear of property prices propped up by low interest rates and lax lending standards.

Stevens said towards the end of this speech that (emphasis mine): ‘The most recent information suggests that dwelling prices have been rising only moderately over the course of this year, with considerable supply of apartments scheduled to come on stream over the next couple of years, particularly in the eastern capital cities.

If you are interested, or already invest, in property, I’ve highlighted the most important part. And it’s important because Stevens is hinting at what won’t be in demand. Especially not in the near future. And it’s all because of supply.

Across capital cities there are 92,102 new units set for completion over the next 12 months. And over the next two years this figure is expected to rise to 231,129.

Just this year alone there were 1,846 apartments under construction in Melbourne. Construction is expected to be completed by the end of 2016. And 4,432 more apartments are expected to come onto the Melbourne market in 2017.

Tighter lending rules have slowed the growth in home lending. ‘All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished,’ Stevens said.

So housing might no longer be an important issue when discussing monetary policy. And this is only because of the strict regulations that will keep borrowers from borrowing.

But while rate changes might still affect housing, Stevens is probably right. When interest rates drop, mortgages do become more affordable. However, more banks are now turning potential home buyers away. Affordability might no longer be the issue anymore. Instead, the issue could be eligibility.

Just like applying for a job interview, you might need to be the right ‘fit’. And this could all be based on the criteria that are relevant on the day.

Yet I don’t see super strict lending practices lasting for long. Australian lenders have large amounts of capital investments in property. According to APRA, Aussie lenders have amassed $3.5 trillion worth of residential assets. Home loans are one of the biggest revenue streams for our Big Four banks. And I highly doubt they will let that revenue stream die.

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?

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