Would a rate reduction revive the Australian housing market?

by Mark Benson on April 29, 2012

in Property in Australia

Would a rate reduction revive the Australian housing market?

As the Reserve Bank of Australia gets ready for Tuesday’s meeting there is widespread belief that a reduction of 0.25% is on the cards. Investors have wholeheartedly gambled on a reduction in base rates with some even suggesting a 0.50% cut is a possibility. If the Reserve Bank of Australia was to decide to maintain base rates at 4.25% after Tuesday’s meeting this would be a body blow for the economy and financial markets.

Why is there a need for a reduction?

Over the last few months, despite the fact that Australia has registered its 11th consecutive year of economic growth, there has been a marked slowdown in some areas of the economy. The mining industry continues to power ahead, despite the fact that the government has introduced new mining related taxes, and is expected to go from strength to strength in the medium to longer term. However, the more traditional businesses associated with the Australian economy have suffered and we are in the midst of a two tier economy.

There is a certain need to reduce base rates in Australia not only to inject more confidence into the economy but also to bring down the relatively high level at which the Australian dollar currently trades on international markets. This is having a detrimental impact on export industries which are struggling to make ends meet despite the “rosy picture” on the surface of the Australian economy.

House prices

There is also growing concern about the housing market in Australia with prices having fallen by 4.4% in the year to March 2012. Despite the fact that the Reserve Bank of Australia is expected to reduce base rates the ongoing reduction in property prices is expected. While the rate of reduction could fall to around 2.5% by the end of 2012, which is better than the previous 4.4% reduction, it is still a worrying time for those with property issues in Australia.

The reality is that the government and the Reserve Bank of Australia can manipulate the figures and interest rates to try and introduce more confidence into the markets but ultimately it is down to buyers. At this point in time there are growing concerns that despite expected economic growth of 3% for 2012 there could still be more troubles ahead. As a consequence it is now imperative that the Reserve Bank of Australia reacts positively to the economic challenges and while some are suggesting a 0.50% base rate reduction this would appear to be unlikely this week.

Is there any upside potential for Australian property prices?

At this point in time it is difficult to see any blue clouds on the horizon due in the main to the challenging economic environment and issues which will come to a head over the next couple of years. This has forced many property investors to sit on the sidelines watching property prices idly fall with no real rush to get back into the market. When you also take into account the fact that the Australian government has introduced a raft of new taxes, which will further reduce consumer spending power, it really is difficult to see where the short-term demand for housing will come from.

The performance of the Australian property market has on the whole been very disappointing over the last 12 months although there are various patches around the country which have outperformed. The mining industry continues to attract a raft of new workers to specific hotspots around the country and with demand for residential properties high in these particular areas it is no surprise to see prices firmer than the market in general. So again we have the mining sector creating yet another subsector to a very vital element of the Australian economy, i.e. the property sector.

Will mortgage rates fall if base rates are reduced?

In a perfect world you’d expect mortgage rates to fall if Australian base rates are reduced by the Reserve Bank of Australia later this week. However, we are in a very difficult and very different economic environment today than the traditional cycles we have seen in the past. While there is no doubt that banks and financial institutions are still very dependent upon base rates as a guide to mortgage rates, etc, there are other factors now coming into play.

The worldwide financial markets have tightened of late due in the main to the issues associated with Greece and other European countries. There is now grave concern that the Spanish authorities will no longer be able to fund their excessive debts and with unemployment in Spain now well over 20% it seems this situation is now coming to a head. The impact this could have on the European financial markets and the worldwide financial markets is holding back many investors from offering liquidity to financial institutions.

So while we may well see a trimming of mortgage rates if Australian interest rates are reduced on Tuesday do not expect to see a like-for-like movement in the current environment.

Are we on the verge of a property market collapse?

While it would be jumping the gun so to speak to suggest that the Australia property market is on the verge of collapse, there are worrying signs. Not only are property prices still falling, and expected to continue so in the short to medium term, but the household budgets of consumers are being squeezed more and more by the government with increased taxes. As a consequence this is likely at some stage to put pressure upon the mortgage market and we could see an increase in the number of defaults which would further reduce confidence in the sector.

The authorities need to find a way to inject more confidence into the economy as a whole and the property sector in particular to give something of a central plank of future growth. If property prices continue to fall year-on-year then more and more people could move towards negative equity and we could see an increase in “fire sales”. It is more likely that we will escape a major collapse in the Australian property market but the authorities need to react sooner rather than later to help under fire consumers.

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