Rate Cuts should mean price growth

09 May 2013


Rebecca Thistleton – The Australian Financial Review, Thursday May 9 2013

Record low interest rates are expected to lead to stronger price growth in the Australian housing market, as well as increased competition between buyers. Growth was stronger during the first quarter of 2013 than in the same period of 2012, although the market stalled in April, a usual occurrence after the traditional first-quarter price push.

The property industry applauded Tuesday's Reserve Bank of Australia move to cut the official rate to 2.75 per cent and the banks which were swift to pass it on to borrowers. Australian Bureau of Statistics figures released on Tuesday showed prices rose 0.1 per cent in March, less than the 1.8 percent economists had anticipated.

Andrew Wilson of Australian Property Monitors said the market was showing signs of improvement unseen since the last property peak. Dr Wilson expects that strength to continue in the coming months. At the beginning of the year he predicted price growth of about 3 to 5 per cent in 2013. "I still think that’s the case, 5 to 7 per cent is the next increment but I don't think we will see that this year," he said.

Dr Wilson said historical trends showed a correlation between an interest rate cut and price growth, albeit with a small time lag. But in growing markets such as Sydney, Perth and Darwin, and to a lesser extent Melbourne, an interest rate rise could have also given prices a boost following months of positive market sentiment. "When interest rates are increased, people see that as being the point in the cycle when they should act before they rise again," he said "It is a sign asset prices are beginning to improve and people want to take advantage of that point in the cycle."

Monique Sasson-Wakelin of Wakelin Property Advisory said lower interest rates were a win for investors, who have been active in the market this year-to-date. But she questioned the sense in cutting rates which were already low because it left less of a buffer for when future fiscal policy stimulus was needed. "We are in a market sweet spot at the moment, price growth is not at peak levels but that is not a bad thing, we cannot consistently be tinkering with the market to maintain boom-time growth levels all the time," she said.

RP Data director Tim Lawless said the REA was likely to be comfortable with the pace of the housing market recovery, with dwelling values continuing to recover, at least in trend terms, over the first four months of the year. "Clearance rates remain close to the 70 per cent mark, suggesting that buyers and sellers are increasingly finding the middle ground in their pricing expectations," he said.

Mr Lawless said future interest rate cuts would likely be dependent on whether there was pressure to stimulate demand for new housing and construction. Housing approvals and construction starts have been low, which has the potential to push up the established priced. The Housing Industry Association said there was still no evidence of a sustainable national recovery in residential construction.

Angus Raine, chief executive of Raine and Horne, said the historically low cash rate would be the stimulus the lagging first home buyer and construction markets needed. "It’s likely the REA had these trends in mind when deciding to drop the rate," he said.


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