Today the Reserve Bank of Australia has kept rates on hold at 1%.
The decision to leave the cash rate on hold today came as no surprise to those following our economy – but watch out for next month …
Here’s what the experts have to say:
Martin Lakos ( Macquarie) comment:
The RBA this month decided to keep the official cash rate on hold at 1%.
Macquarie has adjusted its thinking and now sees the likelihood of an interest rate cut in October rising, followed by another in November.
In Australia the mixed signals from economic data weighs more heavily to the downside, however in our view the RBA will wait for the second quarter GDP growth number, which is released after this month’s board meeting, before acting.
The RBA has downgraded its growth forecast to 2.5% but have maintained a 2020 growth rate forecast of 2.75%.
Comments from Tim Lawless:
The resurgence in Sydney and Melbourne housing values was likely a key topic of conversation amongst the RBA Board at today’s meeting.
In line with rate cuts in June and July, housing values in Australia’s two largest cities have recorded a lift, with dwelling values rising 1.9% and 1.8% in Sydney and Melbourne over the past three months.
August data showed CoreLogic’s national index recorded its first month on month rise since October 2017 and five of the eight capital cities saw dwelling values increase.
Clearly housing market conditions are responding to lower interest rates as well as the recent loosening of loan serviceability rules from APRA and the positive influence of the stable federal election outcome.
The recent step up in the pace of value growth is likely to raise some concern that the lowest mortgage rates since the 1950’s is fuelling renewed housing market exuberance at a time when household debt remains around record highs.
High levels of household debt are manageable while interest rates are very low, however if debt levels remain elevated when interest rates eventually rise, the risk is that households will need to dedicate more of their income towards servicing their debt and less towards spending.
The recovery trend is still very early and there is the potential for the pace of growth to slow as advertised stock levels rise in line with spring, but no doubt the RBA will be keeping a close eye on housing market conditions.
If the recent acceleration in housing value growth is sustained over coming months, we could potentially see additional credit policy levers pulled, aimed at keeping a lid on household debt.
Limiting lending to borrowers on high debt to income ratios could be one option, or introducing hard limits on high LVR lending could be another mechanism that would reduce the risk of a further build up in household debt whilst at the same time allow borrowers to access housing credit and take advantage such low interest rates.
Comments from the RBA:
At its meeting today, the Board decided to leave the cash rate unchanged at 1.00 per cent.
The outlook for the global economy remains reasonable, although the risks are tilted to the downside.
The trade and technology disputes are affecting international trade flows and investment as businesses scale back spending plans due to the increased uncertainty.
At the same time, in most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low.
In China, the authorities have taken further steps to support the economy, while continuing to address risks in the financial system.
Global financial conditions remain accommodative.
The persistent downside risks to the global economy combined with subdued inflation have led a number of central banks to reduce interest rates this year and further monetary easing is widely expected.
Long-term government bond yields have declined and are at record lows in many countries, including Australia.
Borrowing rates for both businesses and households are also at historically low levels.
The Australian dollar is at its lowest level of recent times.
Economic growth in Australia over the first half of this year has been lower than earlier expected, with household consumption weighed down by a protracted period of low income growth and declining housing prices and turnover.
Looking forward, growth in Australia is expected to strengthen gradually to be around trend over the next couple of years.
The outlook is being supported by the low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some established housing markets and a brighter outlook for the resources sector.
The main domestic uncertainty continues to be the outlook for consumption, although a pick-up in growth in household disposable income and a stabilisation of the housing market are expected to support spending.
Employment has grown strongly over recent years and labour force participation is at a record high.
The unemployment rate has, however, remained steady at 5.2 per cent over recent months.
Wages growth remains subdued and there is little upward pressure at present, with strong labour demand being met by more supply. Caps on wages growth are also affecting public-sector pay outcomes across the country.
A further gradual lift in wages growth would be a welcome development.
Taken together, recent labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.
Inflation pressures remain subdued and this is likely to be the case for some time yet.
In both headline and underlying terms, inflation is expected to be a little under 2 per cent over 2020 and a little above 2 per cent over 2021.
There are further signs of a turnaround in established housing markets, especially in Sydney and Melbourne.
In contrast, new dwelling activity has weakened.
Growth in housing credit remains low.
Demand for credit by investors continues to be subdued and credit conditions, especially for small and medium-sized businesses, remain tight.
Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.
It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target.
The Board will continue to monitor developments, including in the labour market, and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time.
Comments from the Finder.com.au RBA Survey
Experts favour Melbourne and Brisbane for property investment
- Sydney is not the most attractive capital city in which to invest your property dollar, according to Finder, Australia’s most visited comparison site.
- In the latest Finder RBA Cash Rate Survey™ – the largest of its kind in Australia – experts and economists were asked which Australian capital city they thought was best to invest $500,000 in property.
- Results were hugely divided with Melbourne and Brisbane sharing the top spot with 27% (6/22) of the vote each.
- Graham Cooke, insights manager at Finder, said the vast majority of economists chose to steer clear of advising investment in Sydney.
- “Sydney has traditionally been Australia’s darling in the property market, but it is no longer the belle of the ball.
- “Prices have just started to recover after falling nearly 15% from the heady days of 2017, but sales volumes are still low and many investors and potential sellers are in a holding pattern.
- “While prices fell across the board, the ratio of house prices relative to income is still higher in Sydney than in other cities, which may slow the bounceback somewhat compared to Melbourne and Brisbane.
- “On the bright side, both prices and auction clearance rates are slowly heading in the right direction in the Harbour City, but these results indicate that the previous market highs are still a way off,” he said.
Which Australian capital city would be the best to invest $500,000 in property?
- Sydney and Canberra received 14% (3/22) of the vote with Adelaide and Perth the least enticing to experts at 9% (2/22).
- When asked if they felt the property market in Australia had turned a corner, fewer than half of the experts (45%, 13/29) said yes and that prices will continue to rise.
- A further 41% (12/29) expected prices to remain at their current level for a while, with only 14% (4/29) predicting a further drop in prices.
- Cooke said these results are a clear indication that recent gains are not the product of a ‘dead-cat bounce’.
- “Recent clearance rates and sale prices in Sydney and Melbourne are tentative but positive.”
- “Potential first time buyers may not be buying at the bottom of the market, but there is still plenty of value to be had with home loans at record lows,” Cooke said.
Cash rate holds
- The Reserve Bank of Australia (RBA) today announced a hold on the cash rate at 1.0% for the second consecutive time, an outcome accurately predicted by nearly all experts (95%, 39/41) in the Finder RBA Cash Rate Survey™.
- Craig Emerson of Craig Emerson Economics said the RBA will save its last few bullets for now, predicting a cut in October.
- “The RBA will be reluctant to use up its little remaining ammunition,” Emerson said.
- Economics professor Tony Makin from Griffith University is one of the 61% of experts who expect the RBA to cut in November.
- “Previous RBA research suggested it takes up to 18 months for the effects of official interest rate changes to feed through to the wider economy.
- “The RBA should therefore be waiting a little longer before cutting further, especially in light of the weaker dollar of recent weeks,” Makin said.
Experts surveyed have dropped their forecasted bottom of the cash rate – the number where they think the rate will not drop below – by more than 50 basis points to 0.57% on average.
This is down from 1.07% in February.
Comments from RateCity
The RBA has left cash rate on hold today at an historic low of 1 per cent.
Reserve Bank Governor Philip Lowe has indicated there will be a prolonged period of low rates and further cuts are still on the table.
While the cash rate has remained steady since July, more than 30 lenders have cut fixed rates, suggesting they are pricing in at least one more rate cut.
Right now, the average 3-year fixed rate for owner-occupiers paying principal and interest on RateCity.com.au is 3.51 per cent. A year ago today, it was 4.10 per cent.
That’s a difference of 59 basis points.
Source: RateCity.com.au Average rate for owner-occupiers paying principal and interest.
RateCity.com.au research director Sally Tindall said:
“There are now over 30 lenders offering fixed home loans below 3 per cent, with more set to follow as the expectations of another cut ramp up.”
“A lot of home owners that fixed their rate at 4 or 5 per cent will now probably feel like they’re missing out, even though it could have been a cracking deal at the time.
“Fixed rates are a contract, and if you break it, you’re likely to be liable for any loss that your bank incurs. Often, this fee can run into the thousands.
“That said, if you are unhappy with your rate, it never hurts to give your bank a call and see what can be done.
“At worst they’ll tell you what your break fees will be, and you can consider your options. At best, there’s a chance, albeit slim, that your bank will cut you some slack, especially if they want to keep you on their books,” she said.
If you have a fixed home loan – can you get out of it?
- Find out break costs: Ask your bank to calculate how much they’ll charge you for exiting your fixed loan early.
- Compare home loans: Find the best home loan on offer that meets your needs.
- Do the maths: How long will it take you to break even if you paid the break fee and switched home loans.
- Make a decision: Decide if it’s worth your while to break your fixed loan and switch home loans.
Things to consider before committing to a fixed rate mortgage
- How do fixed rates compare to variable rates? Make sure you’re happy paying the rate you sign up to, even if rates fall further.
- What’s your plan for the property? If you sell or refinance within the fixed loan term you could be liable for break fees.
- Do you want to make substantial extra repayments or have the flexibility of an offset? Fixed rates typically are far less flexible than variable rate loans so check the terms and conditions before signing.
- How many years do you want to fix your home loan for? Remember it’s a contract that you’ll be expected to keep for the whole term.
- What will you do when the fixed term is up? Check the revert rate, make a plan for what you might want to do when it ends and diarise the end date.
Some of the lowest home loan rates
|Reduce Home Loans||2.89%|
|Well Home Loans||2.97%|
|Pacific Mortgage Group||2.99%|
|3-year fixed rates|
|Well Home Loans||2.74%|
|Reduce Home Loans||2.79%|
|5-year fixed rates|
|Bank of Melbourne||2.94%|
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