What Interest Rate Cuts Mean??

Discussion in 'Property Market Economics' started by MTR, 10th Aug, 2016.

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  1. MTR

    MTR Material Girl Premium Member

    19th Jun, 2015
    My World
    Food for thought......?????
    (Knowledge Source)

    There’s a very clear relationship between interest rates and house prices. As rates fall, people can borrow more, and bid the prices of houses up. So they end up higher than they would have been.

    I don’t see that relationship breaking down this time around.

    But that simple answer hides a bit of complexity. It might be true that prices are higher than they would have been, but they could still be lower than they were last year.

    So while rate cuts are pushing in one direction, what ultimately happens will depend a lot on individual markets, and where they’re at in the cycle.

    The RBA was at pains this week to point out that, overall, the housing market is slowing, with national price growth falling to around 3-5% pa, and most cities posting price falls in July.


    At the same time, the forward indicators are pointing to softer conditions. Auction clearance rates are steady in Sydney and Melbourne, though on lower numbers of auctions.


    At the same time, the number of days it takes to sell a house has risen from recent lows, while the share of houses for sale has fallen to the lowest level since 2012. So the national market overall is backing off the throttle a bit.

    But there’s still a lot of variation from region to region. Take the rental market. Overall, the rental market is softening, with vacancy rates rising, and rental price growth falling to some of the lowest levels on record.


    However, as the RBA points out, a lot of this softening comes down to what’s going on over in Perth.

    The dotted lines in the chart above take Perth out of the picture. The fall in rents is then much less pronounced, while vacancy rates seem to be holding steady. So on that front, the national market looks broadly steady, with Perth and a few other markets dragging down the national averages.

    So that means we’ll see some varied impacts associated with this rate cut. I don’t think it will be enough to put the brake on falls playing out in Perth and Darwin right now, but it’s going to help.

    It’s also probably going to give our boom markets in Melbourne and Sydney an extra kick along. We probably won’t see it in stronger growth rates, but it will probably see the fading booms extend out for a little longer.

    That said, don’t get too excited. The banks held on to half the rate cut, and will probably keep about the same if we get any more this year. So we’re not looking at anything massive.

    Still, overall it’s still a good news story. Rate cuts are good for property prices across the board. You still need to pick your market – now more than ever – but this still coms as a boost.