Coronavirus rate cuts leading to house price ‘bubble’

Right now, the lowest home loan rates in Australia are under 2.5% pa and they could come down even further in the next few weeks.

The lowest home loan rate on InfoChoice right now is 2.47% pa (comparison, variable, OO, P&I) from Reduce Home Loans.

The reason why interest rates are falling in Australia is because the Reserve Bank, like other central banks around the world, is attempting to inject money into households to stave off a looming coronavirus induced recession.

The prime minister today (Wednesday) announced a second economic stimulus and support package, just one week after announcing $17 billion in cash payments, wage subsidies and business support.

The Reserve Bank of Australia (RBA) is meeting on Thursday this week (19 March) to discuss further stimulus measures to combat the economic impact of the coronavirus.

The RBA meeting, two weeks ahead of the regular scheduled meeting, will discuss the “inevitability” of an emergency rate cut. The RBA is now expected to slash the official cash rate to 0.25 per cent this week. Futures markets have priced in a 100% certainty of a cut by April (see update below).

The RBA could even surprise by announcing a 0.50 percentage point cut, taking the official central bank rate in Australia to zero.

‘The RBA could even surprise by announcing a 0.50 percentage point cut …’

IG market analyst Kyle Rodda commented, “It’s widely tipped that the RBA will cut its cash rate to the ‘effective lower bound’ of 0.25 per cent – and most likely, announce its own quantitative easing program,” he said.

A rate cut to this level would mirror the Federal Reserve in the US and its New Zealand counterpart. Furthermore, the RBA will buy government bonds and implement quantitative easing to encourage consumer spending.

A research note released by NAB supports further stimulus.

“There seems little point in waiting three weeks to deliver further support to the Australian economy on the interest rate front,” the economy watch note says.

AMP chief economist Shane Oliver also agrees it is necessary to “stop companies going bust and households defaulting on their loans.”

According to the RBA, interest rates could remain low for up to a decade and COVID-19 could extend this outlook further.

Check out the lowest home loan rate on InfoChoice right now – 2.47% pa comparison rate (variable, OO, P&I) from Reduce Home Loans.

Compare home loans from Australia’s banks, credit unions, neobanks and other lenders at InfoChoice.

Is the RBA printing more money?

‘Printing more money and pumping it into the economy’ is the shorthand explanation of quantitative easing. The RBA’s QE program is actually, at first anyway, about buying government bonds from other investors to keep their price up and effectively support the issuing of more bonds. This injects liquidity, money, into investor markets and companies to keep them investing and keep people employed.

The RBA’s adoption of Quantitative Easing is an extraordinary move by a generally conservative institution. The RBA governor Dr Philip Lowe is widely regarded as a traditional conventional economist schooled at the RBA over almost his entire career.

But the RBA is seeing QE as more and more necessary to combat the economic impact of COVID-19.

Will Australia get negative interest rates?

Some countries have already implemented negative rates to try and stimulate sluggish economies over the last few years.

The Reserve Bank of Australia’s governor Dr Philip Lowe told a parliamentary committee last year that he was prepared to take rates to zero.

“It is possible we end up at the ‘zero lower bound,’ said Dr Lowe.

“I think it's unlikely but it’s possible.”

Sweden took its’ official interest rates under zero in 2010, following the global financial crisis and again in 2014. Denmark, Switzerland and Japan and other countres have also gone under zero per cent central bank interest rates.

In Denmark retail banks have even charged retail customers negative rates, meaning the bank pays you, on some loans. Unfortunately that is not likely to occur in Australia said Michael Youren from Ibis World.

“While it is unlikely that retail banks will pass negative rates on in the form of charging interest on deposits and paying customers to take out loans, these measures (rate cuts and QE from the RBA) will likely lead to lower interest rates charged on mortgages.”

Lowest home loan rate on InfoChoice now – 2.47% pa comparison rate (variable, OO, P&I) from Reduce Home Loans.

Compare home loans from Australia’s banks, credit unions, neobanks and other lenders at InfoChoice.

WARNING: Housing bubble forecast caused by rate cuts

A new Australian property market price surge and eventual “housing bubble” is being predicted by Ibis World warns rate cuts could make home loans more affordable, leading to a housing price bubble. CoreLogic already believes Melbourne and Sydney are experiencing a bubble.

Keep up to date with the latest outlook for Australian property markets at InfoChoice.<