A rate cut by the Reserve Bank of Australia next week could signal an earlier end to the property downturn, a leading economist says.
AMP Capital chief economist Shane Oliver has speculated that a cut to interest rates next week could mean “[Australian] property prices bottom earlier than our 2020 call” after almost 18 months of grim news for the sector.
..earlier rate cuts could see Aust prop prices bottom earlier than our 2020 call & falls have slowed, but -ves remain signif: record unit supply,tighter credit, foreign demand, dashed investor exps,uncertainty re -ve gearing & CGT, & lower rates may not pack same punch as in past
Mr Oliver has said a rate cut by the RBA on Tuesday could usher in the beginning of a recovery for a market that has had one of its biggest downturns in recent memory since its peak in September 2017.
Sobering inflation figures out late last month, combined with continued house price falls, have firmed the odds on the RBA cutting the cash rate.
While the property downturn has slowed across the capital cities, property prices have continued to fall in every capital except Canberra, according to CoreLogic’s Home Index for April.
Senior economist at AMP Capital, Diana Mousina, expects the RBA to cut the cash rate twice this year, the first of which will be in May.
RBA governor Philip Lowe has managed to hold off for a long time. Photo: AAP
“We have been anticipating a rate cut since December. We are saying we will have two this year and after the low CPI last week, we have brought one forward to May,” she told The New Daily.
This view is supported by UBS, which predicted a total price fall of 14 per cent from the peak in October 2017 to June 2020, in its Australian Economic Comment report released on Wednesday.
“The peak-to-trough decline in prices is 8 per cent, worse than the GFC, and near the largest for at least 55 years when REIA data for Sydney started,” the report wrote.
“Looking ahead, we expect price falls to reach 14 per cent, causing a negative wealth effect on consumption. This, coupled with record low underlying CPI, and a per-capita GDP recession, we think compels the RBA to cut rates by 25 basis points in May.”
Ms Mousina says the predicted price drops will be concerning for the RBA.
“I think that the RBA is paying particularly close attention to it, these price falls are the largest in years.
“To some extent, they wanted to engineer it, but it’s probably gone further than they expected and they’re worried about the transition to the consumer spending.”
But Ernst & Young chief economist Jo Masters says that it’s just too tricky to tell if this concern will lead to a rate cut.
“I think the honest answer is it’s a close call,” she told The New Daily. “There are lots of factors for the RBA to weigh up, as always. This one is more complicated as it’s in an election.
“They do have precedents of doing it during an election campaign. They’ve done it before. They’re an independent body, so if the board truly believes the economy needs a rate cut, they will put one in place.”
Tight credit putting the brakes on
Ms Masters argues that because of restrictions on credit lending, a rate cut won’t have as much of an effect on the property market as it has done in previous years.
“Historically, we know it does tend to put a little bit of fire under the housing market. We’ve seen it before when they cut rates in previous housing cycles. It seems likely the banks will pass on a rate cut.
“But the availability of credit is still hard, so a cut wouldn’t have the same effect as it has previously done, but it would help to stabilise house prices. We’ve already seen some early signs of that.”
A cut would benefit existing mortgage holders, but will have little effect on new buyers, she said.
“Just remember when a bank accesses your ability to pay for your mortgage, there’s the APRA direction that they use an interest rate floor of at least 7 per cent, so the amount of credit you can borrow will still be assessed on that metric.
“This makes credit cheaper, but it doesn’t necessarily mean you’ll be able to borrow more money.
“It means for those that have a mortgage you can potentially reduce your repayments.”
Source: The New Daily