Rate cuts make property more affordable, but further stimulus could have an impact on the market
When the Reserve Bank of Australia (RBA) met on Thursday 20 March to discuss further stimulus measures to combat the economic impact of the coronavirus, it slashed the official cash rate to 0.25 per cent
The rate cut to this level mirrored the Federal Reserve in the US and its New Zealand counterpart. The RBA also announced it would buy government bonds and implement quantitative easing to encourage consumer spending.
Printing more money and pumping it into the economy is an extraordinary move, but one the RBA is seeing as more and more necessary to combat the economic impact of COVID-19.
What are the impacts of this on the property market?
A report from market researchers Ibis World warned any easing of monetary policy could make home loans more affordable, leading to a housing price hike and a following bubble.
“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 will likely lead to lower interest rates charged on mortgages,” said Ibis World senior industry analyst Michael Youren.
“Borrowers would be able to service interest on larger loans, and this would likely mean that banks will allow customers to borrow more money. Greater borrowing capacity would continue to inflate property values.”
CoreLogic already believes Melbourne and Sydney are experiencing a bubble, recording month-on-month growth of more than 1 per cent.
Do we need further stimulus?
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 stated with regard to the RBA’s early meeting.
According to the RBA, interest rates could remain low for up to a decade.
COVID-19 could extend this outlook further.
While the property market is yet to be hit, auction clearance rates are slowly diminishing and will be hit further with new property market sales processes enacted to enforce social distancing regulations.
The following table shows clearance rates as to 30 March
Only time will tell what the full impact of the virus will be. Like anything, we will just have to wait and see what government stimulus does to help the economy, while importantly keeping health front of mind.
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This article is general news and information. This article is not financial advice.
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