Why RBA cash rate hold is good for borrowers, bad for affordability

Posted: 6 July 2021 2:31 pm
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This continuing period of rock-bottom rates is still fuelling more borrowing and higher prices, ultimately worsening affordability.

The Reserve Bank today kept the cash rate at 0.10%. While this was widely expected (100% of Finder's experts predicted it), the ongoing low interest rates are really starting to affect housing affordability.

"Housing markets have continued to strengthen, with prices rising in all major markets," said RBA governor Philip Lowe. "Housing credit growth has picked up, with strong demand from owner-occupiers, including first-home buyers. There has also been increased borrowing by investors."

The latest CoreLogic figures show that Australian property prices have risen 13.5% in the last 12 months.

"Housing has become unaffordable for the average Australian first-time buyer, certainly, and furthermore only affordable at all for many Australians in the context of ultra-low interest rates," said ABC Bullion's Nicholas Frappell.

The official cash rate has a big effect on the interest rates of Australian home loans. Being so close to zero, the low cash rate allows lenders to keep their home loan rates under 2% in many cases.

Making money cheaper to borrow inevitably means people can afford to borrow more. And this drives prices up. And rates have been low for so long now that it's starting to push prices beyond what many can afford.

According to Finder's Consumer Sentiment Tracker, the number of people who think now is a good time to buy property has fallen from 66% in January down to 39% in June.

This is the paradox of low rates. Cheaper loans drive prices up, undoing the benefits of the cheap rates. But an end may be in sight. 39% of experts in Finder's latest RBA survey think that property prices will hit a peak by the end of the year.

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