The Reserve Bank has made no move on interest rates for the third month in a row, keeping the official cash rate at a historic low 2%.
Experts predicted the board would continue to hold steady through the middle of the year.
RBA Governor Glenn Stevens says while the economy is expanding at a moderate pace the rate of growth has been below average. He says domestic inflationary pressures are contained and the economy is expected to have spare capacity for a while yet.
“In such circumstances, monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending. Credit is recording moderate growth overall, with growth in lending to the housing market broadly steady over recent months. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities,” Stevens says.
“The Board today judged that leaving the cash rate unchanged was appropriate at this meeting. Further information on economic and financial conditions to be received over the period ahead will inform the Board’s ongoing assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.”
The decision follows mixed results in the housing sector, with Sydney and Melbourne continuing to lead the charge in value growth while other capital cities experience more subdued rates of capital gain.
What does it mean for you?
CoreLogic RP Data Head of Research Tim Lawless says the runaway growth in the Sydney and Melbourne housing markets was likely a key consideration for the RBA board.
He says previous rate cuts in May and February are already stimulating the market, but housing demand is spurred by more than just low interest rates. He says only the Sydney and Melbourne markets have seen substantial value growth of the back of lower rates.
Lawless says the RBA’s decision means home owners and property seekers can maintain a solid focus.
“For current owners they can continue to focus on paying down their debt while mortgage rates remain at their historically low levels. Lenders remain very competitive which provides plenty of opportunities for home owners to seek out the best interest rates available,” he says.
“For those people looking to buy, the stable interest rate decision means they can focus on finding the best mortgage rates, secure a pre-approval from their preferred lender and work towards finding the ideal dwelling to purchase.
“The number of homes for sale in Sydney and Melbourne remains historically low, so for those seeking to buy in those markets they need to remember that prices are rising rapidly and homes are selling at a record pace.”
Lawless says any future cut to the official cash rate – widely predicted to happen later this year – is unlikely to be passed on in full by the banks “due to the higher risk weightings being applied to residential mortgages by APRA.”
All eyes on investors
Following APRA’s decision earlier this year to tighten lending for investment properties all eyes are on that sector to see what affect loan rate increases will have on the market.
Lawless says the RBA will be looking to APRA’s activities to help slow the heated Sydney and Melbourne markets.
“We are expecting investor demand will start to moderate as investment loans are both more difficult and costly to obtain,” Lawless says.
“Additionally, the cumulative effect of low rental yields, worsening affordability, record levels of new dwelling construction and the maturity of the growth cycle are likely to act as a disincentive to any further acceleration in investment demand across Sydney and Melbourne, despite the steady interest rate environment.”
Rents may rise
Money Expert Michelle Hutchison says with the big four banks increasing rates for some of their investment loans, renters may be hit as investors look to pass on the higher costs of borrowing.
“With the big four banks holding majority of the market, national monthly rents could be set to increase by 2.8 percent or $59.40 in higher rent per month if landlords pass on the full cost of the new interest rates on investor loans. This was calculated based on the average home loan of $343,000 over 30 years,” Hutchison says.
“For low income households with one person on the minimum wage, this increase could account for 2% of annual income. This is based on the national minimum annual salary of $34,158.80 ($656.90 per week).
“Whether you’re a mortgage holder, renter or prospective first home buyer, watch out for higher costs on the way and make sure you are prepared by keeping some savings aside before it’s too late.”
Mixed results for growth
Housing values across Australia’s combined capital cities increased 2.8% in July and 11.1% in the past 12 months, CoreLogic RP Data’s Hedonic Home Value Index shows.
Australia’s housing market is now worth $6 trillion according to the latest CoreLogic RP Data Hedonic Home Value Index for July 2015.
Growth in Melbourne outstripped that of Sydney in both July and for the three months to then end of July, with Melbourne experiencing the highest rolling quarterly rate of growth since the three months to August 2014.
Looking at year-on-year growth, Sydney was again the standout performer with an 18.4% increase in dwelling values, followed by Melbourne with 11.5%.
Brisbane was the next best capital with a growth rate of 3.9% closely followed by Adelaide at 3.4% and then Hobart at 2.5%.
Both Perth and Darwin experienced negative growth for the year to end of July 2015, with -0.3% and -5.3% respectively.
“To date, the capital cities have seen remarkable differences over the growth cycle which broadly commenced at the end of May 2012 and since that time dwelling values across our combined capitals index have increased by 30.4%,” he says.’
“Sydney values are 47.9% higher over the current cycle and Melbourne values are 32.1% higher while every other capital city has seen growth of less than 13% over the same period. This highlights the extent to which the Sydney and Melbourne markets have outperformed other markets over the past three years.
By Sarah Millar from RealEstate.com.au