Rates cut means some winners and some big losers

Strong signals the RBA could cut the official cash rate from 1.75 per cent to a new low of 1.5 per cent mean a lifeline for the one area of the economy most at risk from overheating, the housing market.

A cut in lending rates today — now seen as a 60 per cent likelihood — would be particularly welcomed by the property industry where there are clear signs of pressure building in city centre apartment markets.

In contrast, retirees depending on cash savings to finance their lifestyles stand poised to take another blow as term deposit rates look set to be sliced back further.

Though there are arguments that house prices will not be greatly boosted by what would be just another in a long line of rate cuts, the prospect of lower lending rates immediately improves the calculations for home buyers and investors in residential property.

For home buyers an official cut should be substantially — though not totally — mirrored in moves by the major banks to cut their lending rates with standard variable rates now hovering around 5.4 per cent.

As investment markets continue to show weak returns, Australians are clearly taking solace in putting — or keeping — money in the family home, which is a shelter from capital gains tax. First-home buyers may also get some initial benefit from lower lending rates.

But one potential trouble spot forming in the market — even before the RBA announces its move — is that some buyers have been using lower rates not to pay down principal but to take out bigger loans: The HILDA (Household, Income and Labour Dynamics in Australia) survey recently found one in 10 home mortgages is now interest-only.

Separately, another rate cut immediately intensifies the so-called “hunt for yield” where investors find it increasingly difficult to get a decent income from investments as rates and inflation fall to very low levels.

Despite deep disappointment in many quarters with the Australian share market — which remains far behind overseas markets such as the US — a fall in interest rates will almost certainly push more investors out of cash and into shares.

Keen anticipation among traders yesterday that new inflows will enter the stockmarket seeking dividend income was among the factors pushing the broader ASX 200 up through the crucial 5600 level yesterday — it’s highest point for the year.

For retirees though, the picture is now very grim: investments in bank accounts may be government protected, but with ever lower returns the ability to live comfortably off cash held in bank savings accounts continues to decline.

The cut in rates will give further voice to protests against the government’s plans to limit tax-free incomes in retirement and specifically the proposal of a $500,000 lifetime concessional contribution limit in super­annuation.

Opponents of the plan will argue Australia’s self -funded retirement community will need higher-balance limits in the super system to finance a risk-free retirement.