RBA notes continuing decline in house prices despite low mortgage interest rates at June 1 meeting

The continued deterioration of the housing market despite lenders reducing mortgage interest rates to well below 1996 levels was discussed by the Reserve Bank board before it cut the cash rate by 25 basis points on June 1.

Overall, the minutes of the meeting  indicate that fears of a “softening” global situation spilling over into “precautionary behaviour” in Australia prompted the RBA to reduce the cash rate by 25 basis points at its June 1 monetary policy meeting.

It says the decision to cut rates was “finely balanced”.

The RBA notes that “in aggregate, housing prices continued to decline, and activity in the housing market remained weak”.

The board also acknowledged challenges facing new home construction, noting a “sharp fall in dwelling approvals in April partly accentuated by the introduction of new legislative guidelines in Western Australia”.

The RBA highlights that mortgage rates continue to fall and are now well below the average rate of more than 25 years.

“Short-term interest rates in Australia had fallen sharply following the board's decision in early May to lower the cash rate by 50 basis points,” says the RBA board.

“Following the cash rate announcement, most lenders had reduced their standard variable housing rates by between 30 and 40 basis points.

“As a result, the average interest rate on outstanding housing loans at present was about 40 basis points below the post-1996 average, while rates on small and large business loans were 30 and 60 basis points lower, respectively. Members discussed the strong competition among banks for term deposits and the continuing pressure this was having on the funding costs for Australian banks.”

The RBA notes that overall, data on the domestic economy appeared to be broadly consistent with the central bank's most recent forecasts.

“In particular, employment growth was picking up gradually, but the unemployment rate was still expected to move somewhat higher over the coming quarters. Output growth was expected to increase towards trend over the remainder of this year, and inflation (excluding the impact of the carbon tax) was expected to remain in the lower part of the 2% to 3% range.”

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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