Interest Rates – How Low Can They Go?

IN FEBRUARY THIS YEAR the Reserve Bank of Australia once again lowered the cash rate by 25 basis points to 2.25 per cent, the lowest we have seen since the 1950s. Some economists say they would not be surprised if we see the cash rate fall to 1.5 or 1.75 per cent.

RIGHT NOW IN AUSTRALIA, the available information suggests that growth is continuing at a below-trend pace, with domestic demand overall being quite weak. The unemployment rate has also gradually moved higher over the past year.

The CPI has recorded the lowest increase for several years in 2014. This was affected by two things; the sharp decline in oil prices at the end of the year and the removal of the price on carbon.

With other economic factors at play, it was judged by the Reserve Bank that that a cash rate cut would again be appropriate to lift levels of demand and inflation to be consistent with what is currently expected.

As far as the property market is concerned – dwelling prices (particularly in Sydney and Melbourne) continue to rise and interest rates continue to fall and there is still very strong growth in lending to investors in housing assets. This means that the predicament may get much worse for entry-level buyers; each time the rate goes down, housing values are pushed up by investors, making housing somewhat more unaffordable.

We asked Tim Lawless, Head of Research at Corelogic RP Data, whether he saw further falls in interest rates and what effect that might have on the property market.

Will interest rates fall any further?
In all likelihood we will see the cash rate fall further which will flow through to lower mortgage rates. Lower rates are aimed at providing further economic support at a time when economic growth is below trend levels and the labour market is softening. Lower rates are also likely to bring the Australian dollar lower which will provide some benefits to domestic exporters.

How will this impact the property market?
A lower cost of debt is likely to drive further demand in the housing market; however, we don’t think the stimulus from lower interest rates will be as significant as what we have seen at the beginning of the rate-cutting cycle. This is due to the counterbalancing effect of weaker labour markets with unemployment rising, tighter lending conditions (particularly for investors) and compressed rental yields, which is showing rents haven’t increased anywhere near the same levels as dwelling values.

Are there any other forms of Government regulation that are being considered right now?
APRA and the Reserve Bank are becoming increasingly uncomfortable with the level of investment in the housing market, with a specific focus on the Sydney and, to a lesser extent, the Melbourne housing market. Late last year APRA stated they would like to see the pace of investment lending stay under 10 per cent on an annual basis. At the end of last year growth in investment lending was 10.1 per cent. With this in mind, we expect APRA will be vigilant about investment lending and to apply more scrutiny upon lending to this segment of the market. Additionally, ASIC is likely to be on alert to the rise in interest-only loans which have been increasing as a proportion of new mortgage to investors and owner-occupiers.

What should the Government be doing to help lower socioeconomic groups or first home buyers?
The best way for the Government to improve affordability in the housing market is to improve the release of land supply for housing in strategic areas and, in parallel, ensure efficient transport linkages are in place to connect new land supply with major working precincts.

What do you see for the mortgage market for the coming year?
With interest rates moving lower we expect competition across the mortgage market to intensify even further as more mortgage holders look to refinance and secure the best interest rate. This means lenders need to become more strategic in their businesses in order to build their market share and relationships with their clients and prospective clients. Communicating to their market about housing market conditions and changes is likely to become even more important in 2015.

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Samantha McLean

Samantha McLean is the Co-Founder and Managing Editor of Elite Agent and Host of the Elevate Podcast.