Housing industry welcomes RBA cash rate cut and expects another on Melbourne Cup Day

The housing industry has welcomed the RBA cutting the cash rate by 25 basis points today to 3.25% and expects a follow-up rate cut when the bank next meets on Melbourne Cup Day on November 6.

The rate cut came despite capital city dwelling prices surging 1.4% in September, according to RP Data-Rismark.

Praise for the rate cut came from the Housing Industry Association (HIA), which represents the struggling residential building sector.

The HIA says the rate cut was appropriate “given current economic conditions, which are highlighted by the parlous state of the residential construction industry”.

HIA chief economist Dr Harley Dale called on lenders to “deliver today's interest rate cut in full, without delay, to provide the appropriate relief to businesses and mortgage holders".

"There is no funding cost wall to justifiably hide behind," says Dale, who adds that there is also a need for a follow-up interest rate cut on Melbourne Cup Day, with “widespread expectation for that outcome”.

The HIA prepared the following chart, which show that while margins banks earn on mortgage lending fell in August (the grey bars), they still remain at historical highs.

Real Estate Institute of Australia (REIA) president Pamela Bennett said today’s decision “is a great relief for home owners and potential buyers”.

“Home owners always like to see interest rates go down.  This cut means the average loan repayment is reduced from $2,155 to $2,105 or by $50 per month.”

Mark Courtney, Colliers International research director, says the collective 75-basis-point drop in the cash rate over May and June has gone some way to improving confidence in the housing sector, but the latest rate cut was necessary in order for the real estate industry to see a sustained improvement in conditions.

“This year’s rate cuts have contributed to a significant improvement in housing affordability and allowed households additional capacity to repair their balance sheets, and today’s 25 basis point cut will only help the situation further,” he says.

“These drops have gone some way to improving confidence amongst consumers, who have been exercising caution particularly due to the financial situation in the eurozone.”

But he said more cuts were needed this year because from a "property perspective" one rate cut was not enough.

Economists were more circumspect in their responses.

CommSec chief economist Craig James says the RBA “acted to insulate the Australian economy from weakness abroad”.

But he says that while rate cuts have in the past acted to stimulate activity, "the impact on the economy today is more ambiguous".

“While rate cuts help borrowers, they hurt savers," says James.

“The number of savers has soared and currently deposits are creeping up to be almost neck and neck with loans. Deposits represent around 90% of loans outstanding, well up from 75% just five years ago.

“Further only a third of households benefit from a rate cut with a third of families renting while a third of families fully own their homes. The non-home buying public tend to be savers rather than borrowers. So a rate cut will hurt all the families living off interest income.”

James says confidence remains the pertinent question.

“If people don’t have the confidence to spend and instead continue to save and pay off home loans at a faster rate, then the rate cut will have no impact on activity.

“It is also important to note that it is the level of interest rates that does the hard lifting work in the economy, not the change in rates. Interest rates are already below longer-term averages. And judging by what has happened in previous months, home borrowers are more likely to respond to a rate cut by paying off their home loan at a faster rate, rather than going on a spending spree.”

Rismark economist and Australian Financial Review columnist Christopher Joye tweeted that home variable home loan rates would “fall to around 5.4% and 5.5% (near GFC lows); 3yr fixed rates as low as 5.3%”.

“Near GFC lows in home loan rates will galvanize recovery in house prices - great news for home owners,” he added in a follow-up tweet.

Australian Property Monitors senior economist Dr Andrew Wilson called the rate cut good news for home buyers and housing affordability but questioned in a tweet that it “seemed a speculative move as economic drivers have improved recently”.