What Impact Will the RBA Rate Cuts Have on Property Prices?
Just last week, the RBA cut the official cash rate to a record low of 0.5%. With an already buoyant property market – particularly on the east coast – what will these further rate cuts do to property prices?
Interestingly, the RBA itself recently suggested that a 1.0% fall in the official cash rate could lead to a 28% jump in house prices.
In the paper, it states that “a percentage point drop in the expected real mortgage rate would boost housing prices by 28 per cent in the long run”.
Since that point in time, we’ve seen the cash rate fall from 1.5% to where currently sits at 0.5%. With a fair bit of speculation that we could be seeing another cut in the next few months.
If we look at where property prices have moved in response to the RBA rate cuts, we can see that overall there has been a strong rebound.
In fact, prices have jumped 8% across the combined capital cities, according to the latest data from CoreLogic. At the same time, both Sydney and Melbourne have performed strongly recently with Sydney climbing 4.6% and Melbourne climbing 3.9% in the last three months alone.
So clearly the RBA’s decision to continue with their easy monetary policy is having a positive impact on property prices. And based on the RBA, there could potentially be up to 20% in further upside…
Deja-Vu for Property Investors
Interestingly, we saw the same pattern play out last time the RBA started to cut interest rates aggressively. Looking back to late 2011, property prices across the country were stagnating on the back of the fallout from The Global Financial Crisis (GFC). Sydney and Melbourne had seen a period of relatively flat prices during that time.
In late 2011, the RBA started to cut the cash rate taking it down from 4.75% to 1.50% and keeping it there consistently over a five-year period. As it happens, that equated to the recent growth cycle in prices from 2012 to 2017, which saw a 50% increase in national prices.
So with the current global headwinds facing the economy and the admission from the RBA that they will keep interest rates low for a ‘prolonged period of time.’ It appears that markets are already starting to enter a new growth stage.
Big Four Pass on the Cut
Prior to the latest cut by the RBA, it was a widely held belief that homeowners would not benefit from the move, as the banks, who were already seeing their margins squeezed significantly, wouldn’t be passing on the full cut.
It appears that the big four have in fact passed on the cut in full, in what is another win for borrowers. On top of that, 35 lenders across the board have passed on the entire 0.25% reduction.
The reduced interest rates are making borrowing an even more attractive proposition for those looking to invest. When we examine the yields on offer across the country, we can see why.
Looking at the current gross rental yields based on median dwelling values across the country, it’s clear that there are many markets that are at worst neutrally geared and at best positively geared.
A positively geared property is one in which the income received (rental income) is greater than the costs to hold that property. These include such things as interest costs, strata fees, council fees, land taxes and maintenance.
Looking at the average gross yields, based on dwelling values, they are 5.9% in Darwin, 5.0% in Hobart and 4.5% in Brisbane and Adelaide meaning there are likely many potential opportunities for investors.
Low interest rates also assist with borrowing capacity when applying for loans. In many instances, borrowers are able to spend 25% more on a property, compared to this time last year, both with the reduction in interest rates and also with the Australian Prudential Regulation Authority (APRA) reducing the hurdle rate of what is required to service that loan.
The low-interest-rate environment and the uptick in property prices also contribute to what economists call the ‘wealth effect’. This means that as property prices appreciate in value, all those property owners feel wealthier, even if those gains are only on paper and they go out and spend more in the broader economy.
There is also the flow-on effect with the real estate and construction sectors, which are two of the largest employers in the country. So clearly the impact of cutting interest rates will continue to have far-reaching implications for property prices around the country.
With rates at record low levels, there has quite literally never been a better time to access credit and start building your property portfolio.
