RBA Drops Rates to Record Lows

The Reserve Bank (RBA) surprised many with the move Tuesday to slash interest rates by 0.25 per cent to their lowest level on record of 2.75 per cent. The official cash rate is now lower than it was post-GFC, when the RBA took emergency steps to encourage borrowing and spending with big 100 basis point rate cuts.

The RBA indicated concerns over the recent performance of the economy, particularly in regard to rising unemployment, declining national income and a recently backwards trending new housing market.

According to RP Data-Rismark‘s Home Value Index, capital city dwelling values recorded their first month-on-month decline since December 2012, posting a -0.5% fall across the combined capital cities index. Across the major cities, Sydney values were down -0.4 per cent over the month, Melbourne values saw a -0.5 per cent drop, Brisbane values were down -0.7 per cent. Perth values recorded a -2.5 per cent fall. RP Data’s head of research Tim Lawless remained optimistic about the housing market, “Despite the fact that capital city dwelling values fell by half a per cent over the month of April, the quarterly growth trend is a sustainable 1.1 per cent and buyer activity is rising, particularly across the investor segment and non-first home buyer segment.”

Moreover, new dwelling approvals took a hit with data from the Australian Bureau of Statistics (ABS) revealing that residential building approvals fell by 5.5% during March – the largest monthly decline since July 2012. “The sharp decline in approvals during March underlines the delicate state of Australia’s housing market,” commented Shane Garrett, Senior Economist at the Housing Industry Association (HIA), who also was confident that the drop was just a hiccup. “A tentative recovery does appear to be underway but it remains delicate.”

It is likely that both new dwelling approvals and the take up of the First Home Owners Grant have fallen in recent months and the RBA felt the housing market needed further stimulus had these trends in mind when deciding to drop the rate.

That said, the reduction in the cash rate is expected to be the shot in the arm to kick-start a stalling housing market by improving the borrowing power of new home owners and investors. Three of the four big banks have already passed on the cut in full to their customers including the NAB, which slashed its official home loan mortgage to 6.13 per cent per annum – a reduction that will save NAB customers $62.50 per month in interest on the average $300,000 home loan.