What a rate cut could mean for your financial plans.
As the economy continues to resist government efforts to reinvigorate its growth, the Reserve Bank of Australia enacted another rate cut. The latest action brings down the rate to a record low of 0.75 per cent.
Banks, investors, the real estate industry and others will face both opportunities and challenges created by this latest cut. How each industry responds can have a significant effect on individual financial plans.
The reason for the cut
Rate cuts and other measures passed by the government this year have helped to lift the housing markets in Sydney and Melbourne out of crisis after the housing crash. Difficult economic conditions however in other cities have prevented housing from rebounding in their areas.
Government officials hope that the most recent round of rate cuts can raise the housing market in particular and the national economy overall.
As CoreLogic Head of Research Tim Lawless explained to Nine News, ‘Although housing values are now consistently tracking higher, at least at a macro-level, the national index remains 6.8 per cent below the October 2017 peak’.
Experts hope that the rate cuts can rejuvenate the housing market across the board.
A secondary reason for the cut lies in the RBA feeling competition from other countries that have continued to slice rates. Some countries, like Denmark, now have a negative interest rate.
It’s unlikely consumers will see the full benefit
Often when the RBA cuts interest rates, lenders pass on the savings to those home and business owners who hold variable-rate mortgages. Also called adjustable-rate mortgages, these differ from fixed in that the interest rate charged to the lendee changes along with the RBA rate.
Customarily, lenders adjust the rate in the same ratio as that performed by the RBA. This time, banks have declined to do so. The ‘Big Four’ lending banks in Australia announced that their variable rate mortgage holders would only see a partial cut in their rates.
With interest rates hitting record lows, the banks contend that they cannot make enough money off of the mortgages if they follow the RBA’s lead precisely.
What it means for the housing market
Prices of houses in Sydney and Melbourne have jumped three and a half per cent since the last round of rate cuts. Sydney, however, could face a dampening of prices when additional stock opens up next spring.
In most of the country, housing prices continue to lag behind the expected cost increases. This lag could create strong incentives for housing purchases in areas such as Hobart, Darwin and Perth, where prices remain lacklustre or have even declined.
Overall, prices should tick upward in most areas. Growth, however, will remain uneven due to differing local economic conditions.
What does the future hold?
Experts disagree on whether or not further cuts will occur. Some claim that the government will have to adopt unconventional methods apart from rate cuts to spur growth.
Others predict that the RBA may cut to 0.5 or even 0.25 per cent.
While the cuts could spur growth in specific sectors, others sacrifice.
For example, the low rates already hit those who invested heavily in savings accounts particularly hard. Interest rates on their accounts slide along with the RBA rate, putting less money into their pockets. Some savings account holders have seen their interest rates drop to near zero.
With worldwide economic uncertainty continuing to fester, expect that the RBA will cut interest rates even farther. Investors, home buyers, and others should continue to research the market. They can either take advantage of the low rates to obtain capital or plan to move money into more lucrative investments that rely less on interest rates.