How Reserve Bank’s decision to cut interest rates will impact housing markets

The Reserve Bank of Australia’s announcement of a historic rate cut will have deep ramifications for property buyers and sellers, but not the kind many might expect, housing experts said.

A rate cut will boost demand, but to a more limited extent than before. Picture: Jonathan Ng

The Reserve Bank of Australia’s move to cut the cash rate to a record low will save property buyers an average of about $700 a year in repayments, but will not reignite another price boom, housing experts claim.

Governor Philip Lowe announced at the Reserve Bank’s monthly board meeting Tuesday that rates would be cut by 25 basis points to an unprecedented 1.25 per cent.

It was the first time the RBA changed the cash rate since August 2016, with the bank saying the move was necessary to support employment growth and bring inflation back to target levels.

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Market uplift will benefit two buyer types

With the average home loan size in Australia at $384,700, the cut, if passed on by banks, would lead to average savings of about $700 per year for home loan customers, or nearly $21,000 across the life of a loan, according to Finder.com.

RBA governor Philip Lowe announced a cut to the cash rate. Picture: AAP/Darren England

Borrowers paying down loans of $1 million would save about $1800 a year, while those with loans of $750,000 would save nearly $1400.

The savings should be a call to action for would-be property buyers who had been sitting on the fence not wanting to delve into the market, the comparison site said.

But while previous cuts helped fuel property booms in NSW and Victoria, CoreLogic head of research Tim Lawless said housing market conditions were too soft for prices to begin rising again at the frantic pace they did the last time there was a cut.

The average buyer will save about $700 a year on their loan if banks pass on the cut.

Global trade tensions, economic uncertainty and still weak demand for housing due to restrictive lending practices from banks would keep a lid on any potential price surges, he said.

“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,” Mr Lawless said.

Considering prices have been falling across Sydney, Melbourne and many regional areas, the main impact of the rate cut would be a boost in buyer confidence, Mr Lawless added.

CoreLogic research director Tim Lawless.

Combined with moves by financial regulators to loosen the current squeeze on credit, this would help put a floor under falling prices, but not send demand through the roof, he said.

“(The move) should help to support an earlier than expected trough in housing values,” Mr Lawless said.

Real Estate Buyers Agents Association of Australia president Rich Harvey said lower rates would be good for home buyers, but the RBA’s move had a downside.

“It demonstrates the economy is sluggish and needs monetary policy to generate more activity,” Mr Harvey said, adding that a lower cash rate also signalled that the property market needed assistance to turnaround.

He encouraged buyers not to get too excited. “Buyers should not have fear of missing out again as we expect to see a more balanced market with more activity but not crazy conditions,” Mr Harvey said.

“The market is likely to plateau soon, then commence its upward price cycle again but certainly not return to boom conditions.”

House prices remain unaffordable for many buyers in Sydney and Melbourne.

LJ Hooker head of research Mathew Tiller said the rate cut would encourage disenchanted home seekers to reconsider another crack at a property purchase.

A similar trend occurred after the recent federal election when it became clear negative gearing tax benefits would not be removed — a key Labor Party proposal.

“The past few weeks have seen buyers re-engage with inquiries and attendance at open homes both lifting,” Mr Tiller said.

Buyer's agent Rich Harvey.

“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 … Today’s RBA decision bodes well for property owners looking to sell in the second half of 2019.”

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New hopes for home ownership

Economists had long speculated there would be a rate cut this month due to a dragging economy and a range of forces suggesting a need for stimulus, including a weakening employment market.

Brexit delays and the trade rivalry between the US and China also represented increased headwinds for global economic growth.

On the domestic front, inflation has been well below the RBA’s target of 2-3 per cent for some time and household spending has been low.

Economist Sveta Angelopoulos of RMIT University told a Finder.com poll that “it may be an ideal time for a reduced cash rate to have an effective impact on the economy.”

Originally published as How Reserve Bank’s decision to cut interest rates will impact housing markets