INTEREST rates look set to be on hold for the “foreseeable” future as house prices in Sydney and Melbourne continue to slide.
THE Reserve Bank has left the official cash rate on hold at its record low of 1.5 per cent for its fourth meeting of the year, extending Australia’s longest ever run without a change to 21 months.
The previous record of 19 months between January 1995 and July 1996 was surpassed last month. The RBA last cut the cash rate in August 2016, following an earlier cut to 1.75 per cent in May. There has not been an official cash rate increase since November 2010.
“Notwithstanding the improving labour market, wages growth remains low,” RBA governor Philip Lowe said in his statement. “This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time.”
It comes the same day CoreLogic figures for the month of April show house prices in Australia’s capital cities fell for the sixth month in a row, down 0.3 per cent, led by weakness in Sydney and Melbourne.
“Home price weakness is now at levels where the RBA started cutting rates in 2008 and 2011,” AMP Capital chief economist Dr Shane Oliver said in a client note on Tuesday, adding conditions supported his view that rates would remain on hold until 2020.
“Last year’s APRA-driven tightening in lending standards for interest-only borrowers is clearly continuing to impact and along with poor affordability, rising supply, falling price growth expectations and the end of FOMO (fear of missing out) are pushing prices down in cities which have seen strong gains over the last few years,” he said, referring to banking regulator the Australian Prudential Regulation Authority.
“The latest round of tightening bank lending standards around borrower’s income and expenses will add to this. We expect prices in Sydney and Melbourne to fall another 5 per cent this year, another 5 per cent next year and to still be falling in 2020.”
CoreLogic head of research Tim Lawless said the decision was widely anticipated, given core inflation was “just nudging the bottom” of the RBA’s target range at 2 per cent, and unemployment was still too high at 5.5 per cent.
“Nationally, dwelling values have been moving through a controlled slowdown since October last year, which has taken a great deal of pressure away from the RBA to lift rates in order to curb exuberance in dwelling investment,” he said.
“Housing investment has well and truly slowed without any direct intervention from the RBA, highlighted by the fact that credit growth for housing is tracking at an annual growth rate of just 2.5 per cent.”
Mr Lawless said financial markets were still betting that the cash rate wouldn’t rise until July 2019. “It remains likely that the next move will be up, not down,” he said.
“Importantly, mortgage rates could be under some upwards pressure without any change in the cash rate, considering wholesale funding costs are rising as US interest rates push higher.
“Considering the record high levels of household debt and growing number of interest only loans transitioning to principal and interest terms, higher mortgage rates will test the housing market’s resilience.”
Graham Cooke, insights manager at comparison website Finder.com.au, said now would be a good time for borrowers to consider a fixed interest rate.
“There could be big financial gain for those willing to fix but be careful about fixing your entire loan, as the market is unpredictable and your interest rate could swing in either direction,” Mr Cooke said in a statement.
“Fixing $400,000 of your home loan for five years could potentially save you over $20,000, if the variable interest rate increased by one percentage point over this time.”
Source: www.news.com.au
