In what was a widely expected move, the Reserve Bank of Australia has cut the cash rate to an all-time low of 1.25 per cent.
At their monthly meeting on June 4, the Board elected to lower the cash rate by 25 basis points, explaining the decision was aimed at supporting employment growth and providing greater confidence that inflation would be consistent with the medium-term target.
Here’s a quick rundown of the factors driving the cut and the industry reaction:
With respect to the housing market:
- The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities.
- Conditions remain soft, although in some markets the rate of price decline has slowed and auction clearance rates have increased.
- Growth in housing credit has also stabilised recently. Credit conditions have been tightened and the demand for credit by investors has been subdued for some time.
- Mortgage rates remain low and there is strong competition for borrowers of high credit quality.
With respect to jobs and unemployment:
- Employment growth has been strong over the past year, labour force participation has been increasing, the vacancy rate remains high and there are reports of skills shortages in some areas.
- The unemployment rate ticked up to 5.2 per cent in April.
- The strong employment growth over the past year or so has led to a pick-up in wages growth in the private sector, although overall wages growth remains low.
- A further gradual lift in wages growth is expected and this would be a welcome development.
- Taken together, these labour market outcomes suggest that the Australian economy can sustain a lower rate of unemployment.
With respect to growth:
- The central scenario remains for the Australian economy to grow by around 2.75 per cent in 2019 and 2020.
- This outlook is supported by increased investment in infrastructure and a pick-up in activity in the resources sector, partly in response to an increase in the prices of Australia’s exports.
- The main domestic uncertainty continues to be the outlook for household consumption, which is being affected by a protracted period of low income growth and declining housing prices.
- Some pick-up in growth in household disposable income is expected and this should support consumption.
With respect to inflation:
- The recent inflation outcomes have been lower than expected and suggest subdued inflationary pressures across much of the economy.
- Inflation is still anticipated to pick up, and will be boosted in the June quarter by increases in petrol prices.
- The central scenario remains for underlying inflation to be 1.75 per cent this year, two per cent in 2020 and a little higher after that.
According to the RBA, the decision to lower the cash rate will help make further inroads into the spare capacity in the economy.
It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.
The Board says they will continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time.
The RBA’s move to cut rates was widely expected, and no doubt the focus will now turn to mortgage rates and how low they will go.
Mortgage rates for owner occupiers are already around the lowest level since the 1960s and lenders are generally expected to pass on most, if not all of the cash rate cut to mortgage interest rates.
Lower mortgage rates, the likelihood of lower borrower serviceability assessments if APRA delivers on a relaxation to the base serviceability rate later this month, as well as renewed confidence following the federal election, are likely to see an improvement in housing market activity.
However, with credit policies remaining tight, the stimulus of lower rates isn’t likely to be as effective in kick starting the housing market as what we have seen in the past.
Borrowers are facing much closer scrutiny on their income and expenses as lenders become less reliant on HEM (Household Expenditure Measure) benchmarks, and comprehensive credit reporting is providing lenders with greater transparency around borrower debt levels and credit standing.
Overall, the latest rate cuts together with lower serviceability assessments for borrowers and greater confidence following the federal election should help to support an earlier than expected trough in housing values. However we aren’t expecting a rapid reversal in house price declines due to ongoing tight credit policies and, more broadly, economic uncertainty as global trade tensions escalate.
#RBA cuts 0.25% to 1.25% after nearly 3 yr pause to support emp and infl. 13th cut since Nov 2011. RBA to continue to monitor labour mkt & adjust policy to support grth & infl = continuing easing bias.
We see another cut in July or Aug & the cash rate falling to 0.5% mid next yr
— Shane Oliver (@ShaneOliverAMP) June 4, 2019
“Today’s rate cut to 1.25 per cent by the RBA, the first movement in almost three years, will provide a shot in the arm to the property market and will instill further confidence following the Coalition’s victory in the recent federal election,” Ray White Managing Director Dan White said.
“Along with the recent federal election result, APRA’s policy changes and improved auction activity, this decision by the RBA gives more confidence to buyers to enter the market, knowing that key downside risks have been mitigated.
“Perhaps it’ll now be perceived that the risk of not acting in today’s market outweighs the risk of getting into or upgrading in this market.”
If lenders pass the rate cut on in full, the average mortgage holder will save around $58 a month or $700 a year.
ANZ has shocked the market by not passing on the full cut, instead opting to give their variable home loan customers a 0.18 per cent cut.
In contrast, Athena, RACQ and Reduce Home Loans have announced they’ll be passing on the full 0.25 per cent cut.
This takes the lowest ongoing variable rate to 3.19 per cent, from Reduce.
Sally Tindall, research director at RateCity.com.au, said all lenders needed to step up and pass on the cut in full.
“ANZ’s decision to not pass on today’s cut in full is a huge disappointment and now all eyes will be on the remaining Big Banks to see if they can go one better,” she said.
“Reduce, RACQ and Athena were the first out of the starting blocks. This now puts immediate pressure on other lenders to pass the full cut on to both their new and existing customers.
“This rate cut will provide some much-needed relief to mortgage holders feeling the pinch,” she said.
For the average home owner, today’s cut gives them up to $58 extra to put towards the electricity bills, the groceries or the never-ending cost of raising kids,” she said.
“Importantly, for many families, it will also be a chance for to get ahead on their loan,” she said.
“Australia’s household debt to disposable income ratio remains at a record high at 189.6 per cent and continues to be a pressing concern for the RBA.”
.@JoshFrydenberg on RBA lowering interest rate: This rate cut will be welcome news for Australian households and businesses.
— Sky News Australia (@SkyNewsAust) June 4, 2019
“While today’s decision will no doubt bring relief to borrowers across the country, the question now is how soon, and by how much will the nation’s lenders pass on the savings to borrowers?” Mortgage Choice Chief Executive Officer Susan Mitchell said.
“Today’s cash rate cut is good news for the Australian property market, which could see a boost from lower interest rates. According to the latest CoreLogic Hedonic Home Value Index, national dwelling values fell 0.4 per cent in April and 7.3 per cent annually.
“The Reserve Bank would be acutely aware that any cuts to the cash rate may serve to bolster overall activity in the property market and while I do not see dwelling values rebounding to their 2017 peak any time soon, monetary policy stimulus could help put a floor under falling dwelling values.
Ms Mitchell said all eyes will now be on the nation’s lenders.
“If recent history is anything to go by, the last time the RBA cut the official cash rate, few lenders actually passed on the full rate adjustment to borrowers, however lenders would be aware of the intense public backlash they would receive if they did not deliver some relief to borrowers.
“Financial markets are speculating that a second rate cut is on the cards in 2019, and some economists predict as many as three rate cuts by Christmas. Regardless of what the RBA has in store, I urge anyone looking to secure a home loan to speak to their local mortgage broker to ensure they are getting a good deal.
“Interest rates are already hovering at historic lows, and if lenders respond to the RBA’s move by slashing their interest rates, there is an even more compelling case for those with property buying plans to take action.”
Welcoming the cut in the official interest rate by the RBA, the Real Estate Institute of Australia (REIA) said it would help affordability for home buyers and stabilise the housing market.
“Subject to the banks passing on the full cut, this means that for each $100k borrowed annual payments decrease by $250. For a first home buyer, who in the March quarter of 2019 had an average loan size of $338k this means a saving of $70 per month,” REIA President Adrian Kelly said.
“This will further improve affordability with REIA’s Housing Affordability Report out tomorrow showing that in the March quarter 2019, the proportion of income required to meet loan repayments decreased to 30.3 per cent, a decrease of 0.9 percentage points over the quarter and a decrease of 1.0 percentage points over the past year.
“Unlike the last series of cuts in 2015 and 2016 which stimulated the housing market through increased investor activity, this cut will stabilise the market which is already showing signs that the rate of price falls is declining rapidly.
“It is first home buyers that will benefit most with the number of first home buyers decreasing nationally to 23,403 in the March quarter 2019, down 19.7 per cent for the quarter and a decrease of 11.6 per cent compared to the corresponding quarter in 2018,” Mr Kelly concluded.
The Reserve Bank of Australia will need to leave plenty of fuel in the tank as it deals with potentially more global economic headwinds triggered by the United State-China trade war, says mortgage aggregator Finsure Group.
While some forecasters have predicted the RBA may have to cut official rates four times over the next year to bring its cash rate down to 0.5 per cent, Finsure Managing Director John Kolenda said the central bank should not have to carry the burden of responding to an economic downturn.
Mr Kolenda said official interest rate movements have not been the only influence on the domestic economy in recent years and the RBA should only have to cut rates twice to make its contribution to stimulating the economy.
“The RBA will need to leave some fuel in the tank going forward and the interest rate levels aren’t the only tool to stimulate the economy,” he said.
“What happens with future rate movements by the RBA will largely depend on whether there is a deeper deterioration in the US-China trade war and the impact that has on the global economy and the flow-on effect in Australia.
“I think, however, if that situation does occur the federal government can also take some action to address the broader implications of the impact on the Australian economy.
“Some of the initiatives they have already announced such as the First Home Owner Deposit Scheme, tax cuts and infrastructure spending will flow through the economy to help negate any global economic headwinds.
“It should also be remembered that while there is so much focus on interest rates, the macro prudential tools implemented by the regulators has had more impact on the economy over the last few years than a record low official cash rate.”
According to LJ Hooker Head of Research Mathew Tiller, if passed on in full by the banks, the interest rate decision will assist mortgage holders and encourage buyers who have disengaged from the property market to re-evaluate their situation.
The Board’s decision bodes well for property owners looking to sell in the second half of 2019, Mr Tiller noted.
“The past two weeks has seen demand from buyers increase and a reduction in interest will help drive increased attendance at open homes and buyer enquiry levels.
“Despite higher levels of interest from buyers, the number of properties coming onto the market for sale has yet to rise to meet this demand.
“This will help drive competition for well-located and accurately priced properties that are listed for sale over coming months.”
— Macquarie Bank (@macquariebank) June 4, 2019
It was widely tipped and now it’s a reality: the official cash rate has been cut and residential real estate – already dubbed a buyers’ market – is now even more so.
Laing+Simmons Managing Director and President of the Real Estate Institute of NSW Leanne Pilkington said lower interest rates have the potential to increase the positive sentiment already evident among buyers.
“Notwithstanding the broader economic reasons for the Reserve Bank’s decision, at face value the prospect of more affordable and more attainable finance for buyers is welcomed by the industry,” Ms Pilkington said.
“Building on the certainty of the election result and the likelihood of relaxed lending conditions to make it easier for some people to secure finance, a rate cut is another factor contributing to the buyers’ market that has emerged.
“Any incentives to provide buyers greater certainty when making a decision to buy property should be welcomed and, given housing’s contribution to the national economy, the move should be welcomed more broadly too.”
Ms Pilkington backed Treasurer Josh Frydenberg’s personal call for the banks to pass on the rate cut in full.
“The banks have no excuse not to pass on the cut given their own funding costs have declined too. Anything less would represent unjustified greed and for mortgage holders who don’t receive the full 25 basis point reduction in their interest rate, it might be worth moving on,” Ms Pilkington said.
“As prices approach their cyclical nadir, interest rates potentially dropping even further in coming months, and less stringent lending criteria, the REINSW recently declared residential property a buyer’s market. It’s a justifiable call and this will be an important factor in achieving stability in property.
“The industry is hopeful prices bottom out sooner rather than later and that stability in prices is evident towards the end of the year.
“There is clear demand for property from buyers but in many markets, there’s a prevailing lack of supply to meet it. It may be a buyers’ market but vendors need to recognise the advantages currently available to them: a growing pool of buyers with renewed confidence and greater access to cheaper finance.
“Those waiting for a clear-cut election result before listing their property now have the certainty they need. The next few months, albeit the winter period, will be interesting for residential housing,” Ms Pilkington said.