Double rates cut looms as property primed for rebound

Housing market to be reignited with package that winds back lending restrictions and lowers ­rates.

Reserve Bank governor Philip Lowe has indicated two rate cuts would be needed to stop un­employment rising and get inflation back up to its target band. Picture: AAP

The nation’s housing market is set to be reignited with a stimulus package focused on winding back lending restrictions and lower ­interest rates fuelling economic growth, in tandem with tax cuts and increased infrastructure spending.

In a move to drive economic growth, the country’s top financial regulators yesterday opened up lending to first-home buyers and flagged rate cuts at next month’s Reserve Bank meeting to arrest the sliding housing market.

Reserve Bank governor Philip Lowe indicated two rate cuts would be needed to stop un­employment rising and get inflation back up to its target band, hinting that the cash rate would be dropped to a new record low on June 4.

His comments came after the banking regulator eased onerous restrictions on borrowers securing loans in a bid to reduce the squeeze on home buyers.

Under the new rules, a household could get about $60,000 more on a home loan of about $1 million without any change in income.

The intervention is forecast to accelerate a recovery in the ­housing market, which has been plagued by tough restrictions on investors, uncertainty over Labor’s proposed large-scale reform­ of property tax concessions, and wariness in the banking sector over compliance with respon­sible lending laws.

With Scott Morrison yesterday securing a majority government, after winning 76 seats and being on track to claim 78, the fin­anci­al markets continued to rally. The S&P/ASX 200 share index climbed 0.4 per cent to a 12-year high of 6500.1.

Major bank stocks rose between 2 and 3 per cent, adding to Monday’s surge of betwee­n 6 and 8 per cent.

The banking regulator’s intervention is aimed at combating the downward spiral of credit growth, which began ahead of the financial services royal commission, coinciding with requirements for prospective borrowers to fill out highly detailed expense and ­income statements that saw many customers knocked back by ­lenders across the board.

 

The surprise decision by the Australian Prudential Regulation Authority to dump its mandatory 7 per cent interest rate buffer — under which borrowers were require­d to prove they could meet repayments under higher than ­actual interest rates to gain ­approval for mortgages — has added to expectations of a housing market recovery.

APRA will spend a month consultin­g the banks about what their new buffer rate should be to make sure borrowers could still repay their loans if interest rates rose by as much as 2.5 per cent.

Dr Lowe, who was speaking at a business function in Brisbane yesterday, said the RBA would “consider the case” for cutting officia­l interest rates and pledged to help drive the unemployment rate further below its recent seven-year low of 4.9 per cent amid fears the sliding housing market had spooked consumers into shutting their wallets and stopped small business owners from using their homes as equity to access lines of credit.

Following Dr Lowe’s remarks, senior economists dragged forward their predictions for interest rate cuts, firming expectations the RBA will push the cash rate twice to a new low of 1 per cent at its June and August meetings.

“A lower cash rate would support­ employment growth and bring forward the time when inflati­on is consistent with the targe­t,” Dr Lowe said.

“Given this assessment, at our meeting in two weeks’ time, we will consider the case for lower interes­t rates.’’

Westpac chief economist Bill Evans said Dr Lowe “now accepts that he can drive the economy harder with an associated lower unemployment rate without risking any inflation overshoot”.

Chief economists at the Commonwealth Bank, National Australia Bank, AMP, Nomura, HSBC, JPMorgan, and Barclays are now predicting a June rate cut.

Bill Shorten’s election defeat has also been tipped to fuel a resurgence in property investment, following the rejection of Labor’s proposed negative gearing and capital gains tax discount crackdowns.

The Prime Minister’s first-home buyers grant targeting young Australians is expected to drive new entrants into a housing market buoyed by government measures to encourage banks to lend more vigorously, including inter­ventions to help bring down interest rates for small business borrowers.

The RBA, in its most recent quarterly forecasts, triggered a downgrade to its household consumption growth forecasts, slashing its expectations from 2.75 per cent to 2 per cent and labelling the figure, which accounts for 60 per cent of all domestic economic activity, as the “key source of uncertainty” for the local economy.

Dr Lowe said yesterday that weak wages growth in recent years had made it harder for workers to pay down large mortgage debts and spend money to stimulate the economy.

Rather than a minimum 7 per cent interest rate hurdle for prospective borrowers under APRA’s rules, banks will now be required to assess borrowers against their ability to meet repayments on rates that are 2.5 per cent higher than current market rates.

The ditching of the buffer is the latest move by APRA to remove restrictions on the banking sector, after dumping its 10 per cent growth cap on investor lending and casting aside its 30 per cent limit on interest-only lending.

Josh Frydenberg said the federa­l government would do what was required to keep the Australian economy humming.

After meeting with Treasury secretary Philip Gaetjens yesterday, the Treasurer said it remained­ clear the Australian economy was facing headwinds including the rising trade tensions between China and the US, nat­ural disasters and the slowdown of Australia’s housing market.

“Infrastructure spending is absolutely critical,” Mr Frydenberg said. “We will take all the action that is needed to ensure the Australian economy remains strong.”

Faced with a sharp weakening of the economy during the past nine months, Dr Lowe called on Mr Morrison to get moving on policies that would help boost economic growth in the face of faltering household spending, weak investment, and falling housing prices.

The Coalition’s tax cut plan for low- and middle-income workers was identified as being central to stimulating household spending.

“Monetary policy and fiscal policy in the short term can manage the cycle. But in the end we can’t drive stronger growth over the medium term in the Australian economy,” Dr Lowe said.

“What will drive stronger growth are structural policies that promote firms hiring people, investing­, being innovative and ­expanding.

“Things like education policy, the attitude towards entrepreneurship and innovation, the way we invest in infrastructure, the design of the tax system — these are the things that can ultimately drive economic growth.”

The Morrison government, which has achieved a majority in the lower house and increased seats in the Senate, has pledged to legislate immediate tax relief for some households. “Let me be very clear: The tax relief promised in the budget will be delivered,” Mr Frydenberg said.