So the RBA has cut rates: What next?
Four key things to watch in the Australian housing market.
Now that the RBA has cut the cash rate for the first time in 34 months, the situation for both current and potential homeowners in Australia is going to get very interesting. House prices have been falling across the country for the last year, but this cash rate cut combined with several other factors could have a huge impact – and may even stimulate a recovery in the market. Below, I will cover four things to watch out for in the property market. But first...
What is the RBA cash rate?
When you take out a home loan, you're borrowing money from your local bank. It, in turn, has to borrow that money from somewhere else. The cash rate determines the interest rate which banks have to pay to the Reserve Bank of Australia when they borrow money. This, in turn, will determine the interest rate you pay on your mortgage.
If the central bank cuts its interest rate, banks tend to follow suit, but they are not obliged to pass on the whole rate cut to their customers. The interest rate will also affect any savings you have with that bank. We'll be discussing exactly how closely both the savings and variable home loan rates track the RBA cash rate in future blogs.
Following months of stagnation, the RBA cut the rate from 1.50% to 1.25% in June 2019. This will have serious implications for the housing market and house prices, but there are a few other things worth keeping an eye on beyond this cut.
1. Are there more cuts to come?
Everybody knew this June cut was coming – 90% of economists who participated in our RBA Cash Rate Survey indicated as much. However, once one cash rate movement occurs, others tend to follow. So the real question we need to ask is: how many more cuts will we see this year?
Most economists (59%) have predicted two cuts in 2019, meaning one more before December. About one-in-three (30%) expect three cuts in total. With each cut saving the average homeowner about $700 per year, this could be great news for those with existing mortgages. Additionally, each cut will make borrowing cheaper, which could encourage investors into the market. However, each cut is also an indication of a weakening economy, so several could well dampen investor interest.
2. How will APRA's proposed lending buffer affect the market?
When you apply for finance, your bank will need to assess your financial situation to make sure you can afford your mortgage not just at the current interest rate, but at a potential higher rate. As things stand, banks must make sure that borrowers could afford to pay back their loan if the cash rate climbed to 7%.
However, 7% is a very arbitrary figure to benchmark against – the cash rate has been sitting at 1.5% for many months, and has been previously as high at 14%. Proposed new guidelines from APRA would set the new benchmark at 2.5% above the current cash rate, meaning banks would have to assess your ability to pay back your loan with a 3.75% cash rate in the current market. This loosening of criteria should allow easier access to finance, and therefore encourage more buyers to enter the market.
3. Will auction clearance rates continue to recover?
Auction clearance rates represent the percentage of property which sells at auction every weekend. These figures have been falling over the last year, with houses less likely to meet the reserve, and many homeowners holding off for a market recovery. However, rates bounced in the first weekend of June compared to the weekend before. These rates can often be an early indicator of increasing house prices.
4. What will be the impact of the new first-home-buyer deposit scheme?
In the run-up to the election, the Coalition government announced a new first-home buyer's scheme, aimed at making it easier for potential buyers to access credit. In the current market, buyers need to save a 20% deposit in order to be able to purchase a home without a guarantor or lender's mortgage insurance. Saving this deposit can take years. This new program will allow 10,000 buyers to apply for loans with only a 5% deposit while avoiding guarantor and insurance requirements.
This sounds great, but any potential users of the scheme should be cautious. Firstly, borrowing 95% of your home value will increase your monthly repayments substantially. If buying a house for $800,000, this could increase your monthly repayments from $3,400 to $4,000, and mean you pay the bank $100,000 more in interest over the course of the loan (based on a 4.91% interest rate). Additionally, having only a 5% deposit would make you a higher risk borrower, meaning you may also receive a higher interest rate on top of this. This may be a good option for some, but caution is advised.
Combine all of the above four factors with the Coalition's recent election win – which means that negative gearing, whatever your feeling on it, is here to stay – and we've got an unpredictable mix of factors influencing the housing market. How you want this to play out depends on whether you currently own a home or want to buy one. Either way, we're in for an interesting few months.
Graham Cooke's Insights Blog examines issues affecting the Australian consumer. It appears regularly on finder.com.au.
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