Today’s move by the Reserve Bank of Australia to lower the official cash rates will result in a historic drop of 1.25%, which is the lowest rate it has seen in more than two decades. What does this mean for potential homebuyers
It all depends on how banks and lenders respond to the rate reduction. The biggest change that borrowers may feel immediately after the rate cut is an increase in their borrowing capacity. This is especially true given the Australian Prudential Regulation Authority’s proposal for banks and lenders to relax their serviceability rules.
In anticipation of the RBA’s move, many lenders have already reduced their mortgage offerings. This will result in lower fixed rates and variable rates. Realestate.com.au chief economist Nerida CONISBEE stated that although banks may not agree on rate cuts, borrowers should not take advantage of low-interest rates.
“You should remember that even if rates are cut, they will still be the lowest we have ever seen.” While people are allowed to borrow more, rates could go up. Conisbee told Yahoo! Finance.
For homeowners it is crucial to keep an eye on mortgage rates from your lenders, particularly if the central banks continues to ease monetary policies. Conisbee recommended homeowners switch to a lower rate if their lenders do not reduce it.
She said, “This is an excellent time to look at other loan providers since we haven’t had a rate reduction in a very long while, so it’s something banks should be passing along in full.”
Also see: Despite the low cash rates of RBA, home finance is still growing at snail’s pace
A rate reduction would increase buyer demand and make it more favorable for sellers.
Conisbee said that many people changed from private sale to auction during the downturn. But, I think that auction numbers will rise because of more buyers and more competition.
Increasing demand will lead to an increase in house prices. Peter Tulip, a RBA analyst, said that interest rate changes play a significant role in the movement of house prices. This is particularly true during the property boom.
“Interest rates have a large and highly significant direct effect on construction activity. According to the study, low interest rates (partly reflecting lower global long term rates) are responsible for the recent rapid rise in housing prices and construction.
Dangers lurk ahead
Experts agree that a rate reduction wouldn’t be a good idea.
Chris Richardson, Deloitte Access Economics, stated that while the Australian economy is experiencing slowing growth, it’s still not in a dire enough situation to merit immediate support from RBA. He said that Australia’s ability would be lessened to protect itself from future economic risks if the interest rate was reduced.
According to him, “Inflation is less than people think. Wage Growth has stopped accelerating. There are signs that there may be problems with the economy. But we already know large tax reductions are heading our way. APRA have looseened lending restrictions and some concerns over policy changes in the housing market have melted.”
Matt Barrie, a tech entrepreneur, shared similar insights. He said that cutting rates would leave the RBA with less ammunition for dealing with economic problems in future.
“You can’t cut very much from here and even so, we have core, structural problems with our economy that can’t be solved by cheap debt and stimulus — the problem is we don’t do much in this country anymore,” he told News.com.au.