In 2018, the thought of the Reserve Bank cutting interest rates to a record low of 1.25% was laughable to some investors. Fast-forward to 2019 and money markets are now predicting a greater than 50/50 chance that RBA governor Philip Lowe will be announcing a rate cut by the time the year is out. While property-owners may jump for joy, the RBA has expressed concern in the past that reducing rates may encourage households to take on more debt in order to embed themselves in the property market. So what happened to change the state of play so dramatically?
There are a number of international and domestic factors in play:
- Overseas, we’re seeing the prospect of growth for the world economy slowing as a result of the United States and Chine trade war. Across the ditch, the uncertainty around Britain’s exit from the European Union casts another economic veil of uncertainty.
- Back home, we’re seeing a slowing of the Australian housing market, particularly in the drivers Sydney and Melbourne. CoreLogic’s January 2019 report shows Sydney at a -9.7% annually and -4.5% for the quarter, with Melbourne at -8.3% annually and -4% for the quarter. Nationally values have fallen to -5.6% annually and -2.7% for the quarter. There is concern moving forward about how property owners will react as many assets lose value.
- Inflation growth continues to remain below the RBA’s target range of 2-3%, this financial year’s headline rate coming in at 1.9% for the September 2018 quarter and 1.8% for the December 2018. Inflation rates have sat on or below 2% since early 2016.
- Reports such as the NAB Monthly Business Survey and the Illion Business Expectations Survey show business confidence took a steady fall in the second half of 2018, suggesting ‘a significant slowing in the momentum of activity in the business sector’, according to Alan Oster, Chief Economist at the NAB.
- On a positive note, unemployment remains low and jobs growth is, well, growing. The unemployment rate has fallen to around 5%, the lowest since June 2011. It is worth noting, however, that the job count was down 3000 full-time jobs, with most opportunities being part-time in December 2018.
Hesitations by the RBA to lower rates may lessen in the wake of the banking royal commission and a climate where macroprudential lending restrictions have already cooled the supply and demand of property lending. With inflation failing to clear the RBA’s target for 12 of the last 14 quarters, and without continued improvement, it may prompt an RBA move for the first time in two and a half years since rates were last lowered to 1.50% in August 2016. Whether it’s flailing inflation rates or declining business sentiment, it indicates a slowing economy and therefore burgeoning pressure on the RBA to act.
It’s important in the current unpredictable landscape to partner with a broker who is there to advocate for you. Using a broker means you get things right the first time with the benefit of their expertise of the current lending landscape and their support for the life of your home loan. Whether you’re thinking of purchasing, ready to apply or wanting to refinance, FundingPro can guide you through the process. Talk to one of our home lending specialists on 1300 898 765 or apply here.