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RBA leaves rates on hold in November meeting plus wrap up of industry commentary

The Reserve Bank has left its official cash rate on hold at a record low for the 15th consecutive month at 1.50 per cent.

Despite low inflation and weak wage growth, the decision comes as no surprise with some industry experts welcoming the decision.

The RBA last changed its monetary policy settings in August 2016 when rates were edged down 0.25 percentage points to the current low of 1.5 per cent.

“The Bank’s forecasts for growth in the Australian economy are largely unchanged,” RBA Governor Dr Philip Lowe said.

“The central forecast is for GDP growth to pick up and to average around 3 per cent over the next few years.”

The RBA will next meet on Tuesday, 5 December 2017.

REINSW President John Cunningham

REINSW President John Cunningham said the streak of interest rate decisions, which has seen the cash rate remain at the record low of 1.5 per cent, has been extended again.

“The Reserve Bank of Australia last made an interest rate move in August 2016 and on current form, this will continue well into 2018. “We are on the home stretch for 2017 and are backing that the RBA will keep a firm hand on the reins next month,” Mr Cunningham said.

Laing+Simmons Managing Director Leanne Pilkington

Rates were always going to be left on hold today, and they should remain steady for some time, Ms Pilkington says.

“Of course, the housing market is more complicated than this, with different suburban markets performing according to their own fundamentals,” Ms Pilkington says.

“Certainly in this market, we are seeing price emerge as the key driver – more than during the boom of recent years – as discerning buyers seek value for money and quality for their dollar.

“For this reason, vendors must work closely with reputable agents who can articulate the right strategy to secure a timely sale. Agents who quote the highest likely sale price simply to secure the listing are being found out.

CoreLogic Head of Research Tim Lawless

A slowdown in housing market conditions has helped to alleviate some of the pressure to raise the cash rate. The fresh round of macro-prudential policies announced in late March have resulted in tighter credit policies and premiums on mortgage rates for investors and interest only borrowers.  Tougher lending conditions have arguably had a similar effect as a lift in the cash rate, except the effect is more focussed on slowing investment activity across the housing sector while low interest rates continue to provide a broader and much needed economic stimulus.

Since the latest policy announcements from APRA at the end of March, the monthly and rolling quarterly growth rate across Australia’s hottest housing market, Sydney, has turned negative. The annual growth rate has more than halved, from a recent peak of 17.1% over the twelve months ending May 2017 to just 7.7% over the year ending October.  Housing market conditions have also slowed in Melbourne, but not as sharply as in Sydney.

Considering the household savings ratio is at a 5 year low of 4.6%, and an increasing amount of debt is concentrated in residential mortgages, household balance sheets will be tested when interest rates eventually start to rise. Household budgets are already thinly stretched:  subdued demand is evident in weak retail spending (down 0.3% in the September quarter) against a backdrop of record low wages growth of 1.9%, and rising energy costs.  It is highly likely that a lift in the cash rate would further dampen household consumption, potentially leading to slower economic growth and fewer new employment opportunities.

Low consumer price inflation should help to offset stress across the household sector, however rising housing prices have caused many households to dedicate more of their income towards servicing a mortgage despite the low rate environment.   Based on CoreLogic affordability measures, which utilise household income estimates from the Australian National University, Sydney households are dedicating an average of 48.4% of their gross annual household income to servicing a mortgage (based on an 80% loan to valuation ratio and discounted variable mortgage rate), while nationally households are dedicating an average of 37.2% of their gross annual incomes to service a mortgage.  Keep in mind these measures are for owner occupier mortgages which currently enjoy record low rates, so if interest rates were to rise it would likely suck demand out of the economy with mortgagees spending a higher proportion of their income to service mortgage debt.

John Kolenda, 1300 Home Loan

“The RBA has a history of rate movements on Melbourne Cup day but there was little chance of the central bank reacting at its November board meeting despite some of its overseas counterparts lifting their rates.”

Mr Kolenda said while the RBA has indicated it is unlikely to make further interest rate cuts, it will need to tread carefully about any future rise in the cash rate.

“While more favourable employment figures and an improving outlook for the global economy point to the possibility of rate rises, future increases will have a much more significant impact on consumers than previously,” he said.

“The recent inflation data will also likely mean the RBA takes a precautionary approach with any announcements surrounding rises in rates over the short term.

“The last RBA rate rise was seven years ago and there are currently many thousands of mortgage holders who have never experienced a hike in the cash rate. Hopefully, any potential increases will be minuscule and implemented over a protracted period to avoid causing unnecessary panic among mortgage holders.”

Mr Kolenda said while official rates remain low, the lending environment remained highly competitive and home loan customers should not be complacent as it was always possible to get a better deal and save money.

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Azal Khan

Azal Khan is the in-house features writer for Elite Agent Magazine.

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