Rate cut will prompt sales, not growth
by John McGrath
The Reserve Bank’s decision to cut official interest rates by 50 basis points was a welcome surprise. However, if the retail banks don’t pass the full rate cut on, the benefit to the property market is significantly diluted.
In the past, RBA rate cuts have had a direct impact on real estate because all the banks routinely followed suit, so every buyer or mortgage holder benefitted. Now, for the first time in the 25 years-plus that I’ve been in the property game, the banks are acting independently and this is a concern for buyers and sellers alike.
We’ve seen several banks pass on only part of the rate cut and this will no doubt anger many consumers. Some examples – the Commonwealth Bank cut its standard variable home loan rate by 0.4%, Westpac reduced their rate by 0.37%, the National Australia Bank by 0.32%, and the Bank of Queensland cut their rate by 0.35%.
While it’s frustrating to see the banks stop short of passing on the entire RBA cut, at the end of the day this is the new climate of home finance and buyers and sellers will, unfortunately, have to adapt.
I think the RBA cut of 0.5% and the 0.3% to 0.4% cuts being passed on by the banks will stimulate the property market to a degree. It will likely result in more buying, but this won’t necessarily translate to higher sale prices or property price growth.
This is because buyers are still worried about the global economy and consequently, they’re being much more careful about their level of debt and much more cautious when making offers or bidding at auction.
You see, buyers are balancing the allure of lower interest rates on one hand with the worry of what will happen in the global economy on the other. We’re not yet at a point where interest rates are so attractive that they’re universally outweighing buyers’ concerns about the international economy. After the experience of the GFC, Australians – and particularly investors, are very mindful of protecting themselves financially.
There are a lot of signs that there are many buyers out there wanting to buy right now. The number of new loans is increasing, according to Australia’s largest mortgage broker AFG and our own mortgage broking division, Oxygen Homes Loans had a record number of home loan lodgements in March. What’s missing is confidence – and at this stage I don’t think we’ll see a significant change in market confidence without some positive signs of meaningful recovery in the US and Europe.
If you’re in a position to buy comfortably right now, I say go for it. As Warren Buffett says: “Be fearful when others are greedy. Be greedy when others are fearful.” Right now, others are fearful. Property prices are attractive and buyer competition is not too high. Speak to a mortgage broker, get yourself a good interest rate (and definitely consider fixing if you want the security) and look for quality properties in prime locations.
Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Published: Friday, May 11, 2012blog comments powered by Disqus