the RBA's lower interest rates

What do the RBA’s lower interest rates mean for you?

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Sarah Boyle

Currently, it seems almost impossible to turn on the news without being overloaded by opinions and predictions on the Australian property market. The RBA’s decision to cut the cash rate has only intensified this discussion further. This information overload makes it difficult to decipher what the real implications for a homeowner are. As with any economic change, there is a degree of uncertainty. With that said, this time around economists and property commentators tend to share the same consensus: the impact will be hugely positive for the property market – but factors may restrict the degree of prosperity. 

Who are the RBA and what is the cash rate?

The Royal Bank of Australia is responsible for maintaining the stability of the Australian economy. Responding to, and counteracting economic changes to increase spending and borrowing. Deciding on the cash rate is the main method in counteracting these changes – a decision the RBA evaluates once a month. The cash rate is the interest rate the RBA charges banks for loans, or in the RBA’s words ‘overnight money market interest rate’. 

Whilst the RBA does not dictate what interest banks must set for consumers, the cash rate set by the RBA has a flow-on effect throughout the economy and will indirectly affect the consumer’s interest rate offered by the banks. Last month, the RBA cut the cash rate to a historic low of 1.25%.

Positive Implications

Lower Mortgage Repayment 

With lowered interest rates, investors are forced to look at non-cash investments (the housing market) to yield the same ROI. The increased demand helps stabilise house prices and reduce mortgage repayment rates for homeowners. 

Low-interest rates also enable the “side effect” to kick in. This economic expression is where surplus cash can now be spent on new homes or improving existing properties. This enhances the relationship between house prices and mortgage rates. 

The implications of this mean a borrower with a $500,00 mortgage is predicted to save $75 a month, with that number increasing to $151 for a $1 million mortgage as a result of the cut. 

Stabilisation of House Prices and Increased Borrowing (More Finance for Renters)

The rate cut is already having an impact, values increased by 0.2% with houses up by 0.1%, while apartments jumped by 0.5%. Simply speaking, when interest rates are high, house prices are typically lower because homeowners cannot pay off their loans. Conversely, if the cost of banks taking out a loan is low, the likelihood of lending to consumers and business dramatically increases. This enables borrowers to take on higher debt levels resulting in more spending. 

For investors, tight credit (higher interest rates) was previously cited as the largest barrier to investment – the lower cash rate now alleviates this issue. 

The increased net present value (generated by a higher value placed on future rental income) also enhances the attractiveness for an investor and drives up prices.

Prolonged Rental Interest

Unfortunately for first time home buyers, the stabilisation of house prices means buying a house will be very difficult. Inevitability, banks will cut interest rates on savings accounts in response to the lowered cash rate – making it harder to save. 

Important Development  

With the labour government odds on to regain power, many thought strict regulations to reduce the impact of negative gearing would halt borrowing. However, Scott Morrison’s election victory and recent statements confirm that negative gearing will continue at the same rate as before. 

Potential Issues

APRA

An increase in property prices could be stunted due to a change in the way mortgage serviceability (the ability of a borrower to make loan repayments) is calculated. The APRA requires banks to consider if the borrower could make a repayment of a loan if their interest were above 7%. So even if the rate were 1%, it would still be considered against a 7% rate, therefore a reduction in rate won’t necessarily increase the borrowing capacity of buyers. 

Despite no increased loan size, the 7% rate will entice borrowers to borrow a larger percentage of the loan offered – contributing to increased borrowing. 

Household Debt

Debt is reaching unprecedented levels in Australian homes so even more attractive rates and potential prosperity could be too big a gamble for some. Though again, the debt-to-income ratio is stabilising and is unlikely to deter larger investors.
The substantial changes to the economy all provide predominantly positive implications to the Australian housing market – the lowered rates will improve house prices, mortgage rates, appeal to investors and increase the capacity for borrowing. However, it is unlikely to have, at least initially to have the same impact as in the past. What can be agreed on though, is now is the time to be a homeowner. To learn more and stay informed with this ever-changing market, stay up-to-date with the My Rental Blog. Alternatively, contact us to see how we can help manage your property to capitalise on these economic changes.