Will the Recent Interest Rate Cuts Affect Melbourne’s Housing Market?

Once again, it has been widely promoted that the drop in interest rates is “good news” for the housing market. Wayne Swan is taking ample credit as he attempts to persuade public ears that record low rates are solely down to responsible fiscal policy.

In a brief break with tradition, NAB was the first to pass on the cut in full, followed closely by CBA, St George and Westpac. ANZ delayed announcement until after their monthly review, and then surprised all by cutting in excess of the RBA – dropping its standard variable rate by 27 basis points. However, mortgage rates are still above those set during the height of the GFC.

As I mentioned previously, although it may seem logical to assume lending rates initiate price changes, other economic factors play a far greater influence. Unless the needed ingredients are combined, interest rates on their own can do little to change the terrain by any significant, sustainable degree.

Since November 2011 we’ve had seven drops to the cash rate – passed on in part by the banks. On the other hand, it took until mid-2012 for any marginal improvement in median values to emerge (principally boosted by consumer confidence,) and only recently have we seen any substantial uptick.

As I’ve indicated in previous updates, the improved environment has been noticeable from an anecdotal perspective. More bodies are attending open for inspections and a greater proportion of auctioned properties are now selling under the hammer. The latest ABS mortgage lending data for March also came in higher than expected – with gains led principally by NSW and Victoria.

In total, there was a 5.2 per cent rise (seasonally adjusted) in the number of home loans issued to owner-occupiers. However, the trend for first home buyers remains on a downward slope, falling as a total percentage to 14.2 from 14.4 in February. Whilst a drop in rates may bode well on the surface for mortgage holders wanting to pay down debt, the bleak reality remains that for savers, many of whom are would-be first-home buyers, the news is not good at all. 

RP Data also recorded strong increases in mortgage activity, with their RMI (Residential Mortgage Index) showing a 6.6 per cent seasonally adjusted increase for March, easing slightly in April, but starting on strong footing in May.  It’s worth noting the larger percentage has been driven by refinancing.  

The clearance rate this week came in at 72 per cent – the highest unrevised result so far this year.  Year to date, REIV data shows the value of auctions sold sits at just over $4 billion, compared to $2.9 billion at the same time last year. I’m starting to frequently see what can only be interpreted as boom results for the better listings in and around the inner and middle suburbs of Melbourne. The question therefore, is how long can this be sustained?

Any long-term downward direction in rates should always be considered a concern. They sit at the seat of a number of economic problems, and point toward a trend of lower growth. Furthermore, a lengthy period of low rates is harder to reverse as consumers come to rely on cheap credit, unsustainable at higher levels should a bubbly environment call for a reverse course of action.

As a tool, low rates are limited in their effectiveness for stimulating the economy, pushing yield seekers into riskier assets. Since the global economic crisis, the world’s banks have concentrated on lowering rates in order to boost growth. The textbook model indicates this atmosphere will motivate an increase in lending for items such as homes, goods and services; however, monetary policy is a pretty blunt instrument and understandably in our post GFC environment, the appetite to reduce debt and accelerate payments on outstanding mortgages has been far greater than the push to consume – and remains so.

As a result, it’s important for any buyer to enter the property market with their feet planted firmly on the ground and their eyes focused on investment over the long-term.