In February the Reserve Bank Australia broke its cash price movement drought to decrease the official money price (OCR) by 25 basis points, to an historic low of just 2.25%. The RBA Governor, Glenn Stevens, attributed the decision to under-trend growth, weak domestic demand development, an increasing unemployment rate and an economy which has he deemed probably to have “a degree of spare capacity for some time but.”
The selection to reduce prices caught a lot of economists by surprise, but Dr Andrew Wilson, Senior Economist, Domain Group, was not among them. CANSTAR caught up with Dr Wilson for his views on why the price reduce was required – and what it signifies for house rates.
Q: You had been not surprised by the RBA selection to reduce prices – what have been the variables leading you to expect the rate cut?
A: Seeking at the wider economic climate, the RBA’s decision was not a surprise. There were a quantity of aspects at play, like
- Clearly declining national economic activity over the second half of 2014 and increasing unemployment to decade-high levels
- A weakening international outlook and falling resource costs impeding future prospects of recovery
- Low and falling inflation exacerbating chronically low incomes and profit growth
- Weak customer self-confidence and retail sales typically
- Incapacity of national fiscal policy to stimulate economy due to higher price range deficit and consolidation policies – so heavy lifting would be left to monetary policy
- Modest to moderate at ideal performance of capital city housing markets (with exception of Sydney where costs development levels had nonetheless stabilised) would act to offset Bank issues of fuelling property price tag growth with reduced prices
- Robust new developing activity largely confined to speculative inner city unit approvals with mixed and longer-term impact on economy
Q: Are you expecting residential house rates to rise as a outcome of the price reduce? I
A: The correlation among decrease interest rates and higher house prices depends on the nature of the existing cycle and of course the macroeconomic atmosphere. Don’t count on residence rates to rise from this cut (and other people that could stick to) as its impact will be offset by weak neighborhood economies – except in Sydney.
Capital city cycles will converge and reflect local supply and demand variables with prices having a minimal effect. A flatter cycle general will resemble the 1990’s pattern right after the “recession we had to have”. Sydney development will eventual moderate as affordability barriers kick in due to underlying low incomes growth.
Q: In common terms, do official money rate movements impact the value of industrial property?
A: Only in terms of the common and nearby macroeconomic influence on demand.
Q: In your view, which groups of customers are the greatest winners with lower prices?
A: Once the banks pass on this cut, households with mortgages will naturally advantage but you have to bear in mind generally only 30% of home owners have a mortgage. With increasing numbers of fixed revenue superannuants, falling prices have a unfavorable impact on incomes for this group.
You can read Dr Wilson’s Domain weblog post on reduce prices right here.
Canstar comment:
Borrowers must remember, of course, that a “rate cut” is only beneficial as an assessment tool if you know exactly where prices sat to start with. Click here for more details on the interest prices of various lenders just prior to the RBA move. And you can examine house loans right here.
Domain: Price cut not a surprise
