At its meeting yesterday (5th June 2018), the RBA Board decided to leave the cash rate unchanged at 1.50 per cent for its 20th consecutive meeting.
“The economy still isn’t growing fast enough to warrant an increase,” says REA Group Chief Economist Nerida Conisbee. “The issue is consumer confidence. While businesses are feeling far more confident, this is yet to flow through to consumers.”
“Business growth is occurring however it is taking far longer for them to pass on wage rises to their employees. At some point, this has to happen. As we have seen recently in the US, when wage rises begin to happen, the RBA can move quickly on rates.”
“Borrowing costs are already rising and many investors are paying more than what they were 12 months ago. Part of this is because US rates are increasing and Australian banks borrow from offshore to fund some of the money that they lend out.”
“Banks are coming under other pressures as well and this will continue. The final outcome of the banking royal commission won’t be known until early next year however it is likely to include some restrictions to the amount that banks lend.”
“While rates are stable, it is always a good time to pay a bit more off your home loan so you are well prepared when they are start to move,” says Conisbee.
“This is of little surprise given some of the underlying weaknesses still prevalent in the Australian economy; a 0.4% decline in the Australian housing market in the year to May, weak wages growth (2.1%), high underemployment (8.3%) and core inflation at the lower bound of the RBA target range (2.0%),” says CoreLogic Head of Research, Tim Lawless.
“Financial markets are not fully pricing in a rate hike until October 2019. That is despite the latest RBA forecasts suggesting headline inflation will reach 2.25% by the end of this year and unemployment will fall to 5.25%. From a housing market perspective, a stable rate environment is positive.”
“However, there is risk that mortgage rates could rise, regardless of the steady cash rate, due to higher funding costs being faced by lenders overseas. At the end of May, standard variable mortgage rates for owner occupiers remained at their lowest level since 1965, averaging 5.2% and the average discounted rate is tracking even lower at 4.5%.”
“The average three year fixed rate is lower yet again at 4.15%. Even if mortgage rates do rise, they are still well below the twenty year average of 6.8%.”
“Despite mortgage rates being low, activity in the housing market has slowed since 2015. CoreLogic’s latest estimates indicate the number of settled residential property sales is down 7.7% year on year and transaction numbers are 15.1% lower relative to the recent 2015 peak.”
“Although interest rates are set to remain on hold for the time being, the availability of housing credit has tightened substantially, which is the primary driver of slower housing market activity and falling home values. The latest figures on housing credit show the monthly rate of growth, at 0.43% is the lowest since June 2013, dragged down mostly by less lending for investment purposes.”
“Credit policies are likely to remain tight, if not even tighter, with APRA advising lenders to focus more on reducing their exposure to high debt to income loans. As a result, we expect housing market conditions to continue their slow decline, at least from a macro perspective. Since peaking in November last year, national dwelling values are down 1.1%. There are exceptions to this national picture, with dwelling values in Brisbane, Adelaide and Hobart at record highs.”
Graham Cooke, Insights Manager at finder.com.au, says homebuyers may want to consider purchasing in a cooled market.
“For those mulling over buying their first property, this year could be a good time to snap up a bargain if prices do take a tumble.
“With some heat removed from the market, cheaper dwelling prices could be a first home buyer’s ticket into the property market.
“A cheaper price tag means they’ll have a smaller deposit, meaning they can jump onto the property ladder sooner,” he says.
The analysis shows Brisbane, Perth and Darwin housing prices are also tipped to fall this year, with no experts or economists indicating a rise in Darwin.
Brisbane housing price are most likely to plummet with 23% of respondents forecasting a fall of over 6%, which is the greatest predicted fall among the capital cities.
“This is also good news for those looking to buy in Brisbane, but things won’t be as peachy for sellers in the Sunshine State,” Mr Cooke says.
On the other hand, Adelaide and Hobart were identified as growth markets among the panel with 55% of respondents estimating 1-2% growth in Adelaide, while a combined 72% are forecasting Hobart prices to lift by 1-2% or 3-4%.
“The quieter cities of Adelaide and Hobart could be hot spots for investors wanting to unlock capital growth, or for homebuyers looking to put their property on the market,” he says.
1300HomeLoan Managing Director John Kolenda said mortgage holders could be hit with another round of out of cycle rate increases from lenders independently of the RBA’s decision due to cost of funding pressures and regulatory requirements.
“These increases are already starting to flow through and we could see upward rate movements of more than 20 basis points,” Mr Kolenda said.
“If the lending environment wasn’t complicated enough, the spotlight on the banks from the Hayne Royal Commission into the financial services sector is making home finance more difficult, particularly through tighter controls on customer living expenses which has resulted in borrowing capacity for consumers dropping 10-30 per cent over the past quarter.”
Mr Kolenda said the dramatic developments in the financial services sector have highlighted how important it is in the current environment to have the expert guidance of an experienced mortgage broker.
“Brokers can help new home loan customers through the more stringent application process and enable existing mortgage holders to secure the best terms and interest rates through their access to a wide variety of lenders,” he said.
“With the huge number of rate products, significant differences between rates offered by different lenders and widely varying qualifying criteria, navigating through the 2018 lending minefield would be very difficult without having a broker by your side.”
Mr Kolenda said while the current circumstances seem more challenging for home loan customers, lenders are still competing vigorously for business.
“There are still deals to be done, with a broker best placed to secure that deal,” he said. “When it comes to your home loan, never be complacent.”
REINSW President Leanne Pilkington said we expect to see the RBA leave interest rates in a holding pattern for the next 12 months.
“The housing market, from a number of key indicator perspectives, has peaked,” Ms Pilkington said.
“Prices are easing, clearance rates have dropped, and residential building approvals for April 2018 showed a 5 per cent decline, which is more pronounced than most expected.
“We’re seeing the market correct at the moment, but in a sustainable, soft-landing way. Raising interest rates prematurely could jeopardise this soft landing, therefore we expect no changes to interest rates until at least April 2019 where we could see an upward movement,” Ms Pilkington said.
“Today’s decision to keep the cash rate steady at 1.50 per cent was consistent with expectation. It remains our view that there will be no change to the Official Cash Rate in 2018,” said HIA Senior Economist, Geordan Murray.
“The economic outlook remains positive and we anticipate that further job creation will eventually take up the remaining latent capacity in the labour market. Only then are we likely to see inflationary pressures reach a point where the Reserve Bank Board would consider deviating from the current interest rate setting.
“There has been significant improvement in the labour market over the last year but further improvement is necessary to reach full employment.
“Comments issued by the Reserve Bank Governor today noted that conditions in housing markets vary considerable around the country and also noted the slowing of credit growth which is being primarily being driven by a slowdown in investor activity.
“The withdrawal of investors from the market has contributed to the deterioration in indicators of home prices in Sydney and Melbourne but leading indicators of building activity are yet to show substantive evidence of a similar slow down.
“The volume of residential building activity in the pipeline should see the industry maintain a strong level of activity throughout the year ahead, however it remains a risk that the recent tightening in mortgage lending will eventually become a more significant head wind as the year progresses,” concluded Geordan Murray.