Home buyers have been forced to re-think plans after the Reserve Bank of Australia’s unexpected decision on Tuesday to keep interest rates on hold at 3.85%.
Financial markets and economists at all of the major banks had tipped the RBA to cut the cash rate to 3.60% at its July meeting, providing relief for households with a mortgage and boosting borrowing power for buyers.
However, the decision to pause could actually be good for buyers, according to REA Group senior economist Anne Flaherty, who noted rate cuts tend to push home prices up.
“Yesterday's decision to hold could be considered bad news for mortgage holders on variable interest rates, but on the other hand, for those people who are yet to get into the property market and who are currently looking to buy, it's not necessarily bad news,” Ms Flaherty said.
“We know that typically when interest rates are lowered, that can fuel upward growth in property prices.”
She said though some buyers might have had a knock to their confidence after the RBA announcement, there was a “strong chance” a cut would be delivered in August.
RBA Governor Michele Bullock delivered the unexpected news of a rate hold after July's RBA meeting. Picture: Getty
“If that happens, that might undo some of the nerves that have emerged from yesterday,” she said.
“For someone who buys now, by the time they settle, they might be able to get a lower interest rate anyway.”
Following Tuesday's rates decision, Reserve Bank governor Michele Bullock said the board wanted to see the quarterly inflation numbers – to be released on 30 July – before making further cuts to the cash rate.
“Quarterly trimmed mean inflation has only been in our 2% to 3% target range for one quarter,” Ms Bullock said.
“We’ve already cut the cash rate by 50 basis points since February this year, the effects of which are still to flow through to the economy.”
REA Group economist Anne Flaherty said she was still expecting a rate cut in August. Picture: Supplied
She said the board – whose nine members voted to hold rates by six to three – was not divided on whether rate should be cut, but when.
“It wasn’t really directionally where we think we’re heading in terms of easing, it was more about timing,” Ms Bullock said.
“There’s five weeks until the next meeting, by then we will know what the June quarter CPI is.
“If it comes in – as we think it will – continued decline, then that validates our easing path.”
The decision to wait for quarterly inflation data comes after the monthly Consumer Price Index (CPI) showed inflation had stayed within the RBA’s target at 2.1% annual growth to May. Annual trimmed mean inflation – the central bank’s preferred measure to consider – rose 2.4% in the month but was down from 2.8% in April.
Ms Flaherty said she could see why the RBA would want to see quarterly data before making a cut, as that data was more robust.
“It's just a nature of the data. [The monthly CPI data] doesn't encompass everything and what that means is that the monthly indicator can be a bit more volatile than the actual official inflation data,” she said.
Window of opportunity
Melbourne-based buyers advocate Cate Bakos said people who were currently looking to buy were actually in a better position now, than if rates had been cut.
“Most people who are in the market are relieved that they've got at least another six weeks to buy while they can and not experience an uber-competitive environment,” Ms Bakos said.
“I've had a lot of people desperately wanting to buy in winter to avoid the herds. This gives them a chance to be able to purchase in better conditions before the market really takes off.”
Buyer demand tends to rise when interest rates are cut. Picture by Max Mason-Hubers
Ms Bullock said interest rates were just one part of why many property seekers – and first-home buyers in particular – struggled to buy a home.
“It’s not only the interest rates that are the issue for the young people, it’s the housing prices,” she said. “There’s nothing we can do about housing prices, and in fact I’ve heard criticisms that we shouldn’t lower interest rates because housing prices will go up – so we can’t win."
She indicated August could bring with it lowered rates, though she was cautious not to give any guarantees.
“We don’t want to end up having to fight inflation again, we want to make sure we’ve nailed it,” she said.
“Provided we stay on track with our inflation, which that’s what we’re looking to do, then there is opportunity for interest rates to come down."
Ms Flaherty said though the July decision was a shock, buyers and mortgage borrowers alike should not dismiss future predictions of an August cut.
"It's not if it's when," she said. "We said there was a really good chance of July, but I still think there's a really good chance of a cut in August. So for those mortgage holders who are struggling, hang in there because there is still a very strong chance we will see interest rates move within the foreseeable future."
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