How will the interest rate cut affect the housing market?

Last week’s interest rate cut will provide a welcome reprieve for those home owners currently under mortgage stress.

It will also likely encourage an improvement in consumer confidence which in turn, would create more retail sales transaction activity. Conversely however, given the overall economic conditions, it’s unlikely that two 25 basis point cuts to interest rates will provide enough stimulus to result in any significant turnaround in property value growth.

So over all, what impact will this month’s interest rate cut have on the housing market?

The Reserve Bank (RBA) decided to cut official interest rates this week by 25 basis points, taking the cash rate to 4.25% which became the second consecutive month for a reduction in interest rates.

Incidentally, this is the first time since February and March 2010 that we have seen successive interest rate changes, and the first time since January and February 2009 that there has been successive rate cuts.

At the end of November the average standard variable mortgage rate was 7.55% and the average three-year fixed rate was 6.4%.

From a housing market perspective, the big question is: Will the successive rate cuts help to stimulate activity in the housing market?

Undoubtedly interest rate cuts improve housing affordability.

But don’t forget that capital city property values have fallen by -4% over the 12 months to October 2011, while rental rates have risen by 4.6% which also improves affordability.

Although history can be a guide to the future, we feel that conditions are somewhat different this time round – property values are higher than they have been before and although interest rate cuts and value falls help boost affordability, it remains much more affordable to rent than it is to purchase.

A raft of economic indicators suggest that market conditions may be somewhat different than those of the past. Retail trade has grown by just 3.4% over the 12 months to October 2011 which is well below the decade average growth of 5.4% annually. GDP Data released for the September 2011 quarter last week shows that the Australian economy expanded by 2.5% over the year compared to an average expansion of 3% annually over the past decade.

The data also showed that households continue to save around 10% of their income which is at levels not seen since the since the mid 1980s.

The total value of housing finance commitments have grown by just 4.1% over the 12 months to September and have fallen by -1.3% when refinances are removed. These figures are well below the respective decade averages of 9.4% and 8.9%.

Considering the European Governments are currently experiencing a debt crisis, not to mention the ongoing weakness of the US economy, these markets are certainly not looking as strong as they were over the past 10 years.

Given the overall cautious nature of Australian consumers and the weak economic conditions in a number of other advanced economies, it would seem unlikely that even if the Australian economy continues to perform comparatively well, credit for housing will be as freely available as it has been in the past over the next 12 months.