PROPERTY GROWTH TO STALL DESPITE RATE CUTS
Written on the 3 January 2012
RP Data research analyst Cameron Kusher is not confident that two 25 basis point cuts to interest rates will provide enough stimulus to result in any significant turnaround in property value growth.
“We suspect that consumers will remain cautious and continue to pay down their debt,” he says.
“Given this, if the cut is passed on it would likely provide welcome relief to home owners and may encourage some increase in sales activity next year, however, it is unlikely to provide a stimulant for property values to once again start increasing given the broader economic conditions.”
Now that 25 basis point cut has been passed on by the Big 4, standard variable mortgage rates will revert to decade average levels. If three-year fixed rates remain unchanged, they will be 66 basis points below the decade average.
From a housing market perspective, the big question is whether the successive rate cuts will help to stimulate activity in the housing market.
“Undoubtedly interest rate cuts improve housing affordability,” says Kusher.
However capital city property values have fallen by 4.0 per cent over the 12 months to October 2011, while rental rates have risen by 4.6 per cent which also improves affordability.
“Although history can be a guide to the future, we feel that conditions are somewhat different this time round. Property values are higher than they have been before and although interest rate cuts and value falls help boost affordability, it remains much more affordable to rent than it is to purchase,” explains Kusher.
A raft of economic indicators suggest that market conditions may be somewhat different than those of the past. Retail trade has grown by just 3.4 per cent over the 12 months to October 2011 - well below the decade average growth of 5.4 per cent annually.
GDP Data released for the September 2011 quarter this week shows that the Australian economy expanded by 2.5 per cent over the year compared to an average expansion of 3 per cent annually over the past decade.
The data also showed that households continue to save around 10 per cent of their income - levels not seen since the mid 1980’s.
The total value of housing finance commitments have grown by just 4.1 per cent over the 12 months to September and have fallen by -1.3 per cent when refinances are removed. These figures are well below the respective decade averages of 9.4 per cent and 8.9 per cent.