RBA bow to economic pressures and cut rates for third time in 2019

RBA bow to economic pressures and cut rates for third time in 2019
Joel RobinsonDecember 7, 2020

The RBA have cut rates for the third time this year, bringing the official cash rate down to a historic low 0.75 per cent as consumption remains the main concern along with the unemployment rate and the slow wage growth.

The cut comes hours after CoreLogic released their September Home Value index which showed national dwelling values rose 0.9 per cent over September

RBA Governor Philip Lowe noted after the meeting that "there are further signs of a turnaround in established housing markets, especially in Sydney and Melbourne.

"In contrast, new dwelling activity has weakened and growth in housing credit remains low.

"Demand for credit by investors is subdued and credit conditions, especially for small and medium-sized businesses, remain tight.

"Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality."

Within 15 minutes of the announcement, the likes of Athena Home Loans and Homestar finance have passed on the full 25 basis point cut.

Reduce Home Loans passed on 20 basis points.

The lowest rate owner occupier variable home loans, according to Canstar. To enlarge, click here.

RBA bow to economic pressures and cut rates for third time in 2019

Dan White, the managing director of Ray White, said today’s rate cut by the RBA is a win for anyone looking to make a move in the property market, provided it's passed on by banks and lenders to its customers.

“The optimism on the ground across the country for both buyers and sellers is palpable right now and that’s highlighted in our auction clearance rates," White says.

CoreLogic head of research Tim Lawless said the recent evidence of a strong rebound in Sydney and Melbourne housing values wasn’t enough to stave off a rate cut.

"A trend towards higher unemployment and a slowdown in jobs growth were likely the primary factors in the RBA’s decision to cut rates to a new low, as well as concerns around persistently weak household spending, subdued wages growth and low inflation," Lawless noted.

"Lower interest rates together with a subtle loosening in credit policies and improved housing sentiment has seen national housing values recover 1.7% of the 8.4% peak to trough decline in value, with a substantially larger bounce in Sydney and Melbourne

Lawless said the rebound in housing conditions should help to support an improvement in economic conditions as higher housing prices translate to a wealthier and more confident household sector who will hopefully be inclined to spend more.  

"Stronger housing conditions should also support the residential construction sector where approvals dropped through the housing downturn. 

"Both household spending and residential construction activity have weighed on economic growth, so a turnaround in these sectors would be a welcome turn of events. 

"Although the housing recovery is likely to add to Australia’s economic momentum, it comes amidst record levels of household debt and ongoing affordability challenges. 

Lawless suggested there is a risk that lower interest rates could fuel a further rise in household indebtedness as housing credit picks up and investors once again become more active, while higher housing prices are likely to curb participation from first home buyers despite the lower cost of debt. 

In this month’s Finder RBA Cash Rate Survey 45 experts and economists made their predictions, with 55% (25/45) correctly predicting an easing of the rate.

They cited the recently released data on employment, retail sales and consumer sentiment as the main drivers of the cut.

Graham Cooke, insights manager at Finder, said nearly three-quarters (72%, 26/36) of experts predicted that the cash rate will reach 0.50% before it starts to increase.

“The RBA uses each cut like a defibrillator to zap the economy back to life but as the rate gets closer to zero, they are running out of options," Cooke said.

“An injection of cash [quantitative easing] and the potential of a negative cash rate may be the only option to stimulate the economy."

Cooke said that lenders are likely to pass on most, but not all of the 25 basis point rate cut if recent history is any indication.

“From across the market, we’ve seen more than 8,700 loan products reduced since June 2019.

“Some lenders have passed on the full 50 point reduction (from the June and July cuts), but most have not.

“After today’s cut, you can expect to see more lenders offering variable rate loans that start with a ‘2’, so if yours doesn’t start with at least a ‘3’ it’s time to shop around,” Cooke said.

Joel Robinson

Joel Robinson is a property journalist based in Sydney. Joel has been writing about the residential real estate market for the last five years, specializing in market trends and the economics and finance behind buying and selling real estate.

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