February rate cut tipped to boost Australian housing market

Economists are tipping the central bank to deliver a 25-basis-point cut to interest rates at its February 7 meeting, a move that would almost certainly boost the property market.

The futures market is pricing in a 99% probability that the RBA will cut rates when it next meets.

Westpac chief economist Bill Evans, who has arguably the best recent track record for forecasting rate movements, having called the November and December cuts in July, is sticking with his view that the Reserve Bank will cut the cash rate to 4% in February and then once more before the end of the year as part of a 100-basis-point easing cycle. 

Evans’ chief reasons for a February rate cut are weakening world growth, as well as domestic constraints. 

“The domestic economy faces headwinds: interest rates, the high dollar, stretched housing affordability, household debt and fiscal consolidation. 

“Together, these factors suggest the consumer, housing construction and public investment will restrain growth. In short, the risk is that growth will persist at a sub-trend pace for a little longer,” Evans says. 

If the RBA is looking for data to confirm a rate cut, the most recent housing credit and retail sales figures should provide the impetus. 

In November housing credit rose by just 0.5% to be 5.7% higher over the year, the weakest annual growth since records began in 1977, while in the lead-up to the Christmas sales retail turnover remained unchanged in November at $20.9 billion on a seasonally adjusted basis following 0.2% rise the previous month.

A February rate cut is also forecast by St George Bank’s chief economist Besa Deda, mainly as a result of continued uncertainty in Europe.

Deda says there are likely to be two cuts in 2012 but that external factors are likely to play a large part in determining what the RBA will do.

"Ultimately, how much cutting the RBA does in this easing cycle will depend significantly on European developments," Deda says in an investor’s note. “The deeper the European crisis, the more easing the RBA might need to do." 

A rate cut will be welcomed by many sections of the property market. 

Property Group Ray White booked $2.1 billion in sales in December, with chairman Brian White saying this was an even better than $2.4 billion worth of business done in November when compared on a sales-per-working-day basis. 

White says the result is “more proof that the recent reduction in interest rates is continuing to lift activity, giving confidence to purchasers that a continuing fear of more rate rises will not eventuate”.

Mortgage broker AFG recorded a 5.4% increase in mortgage sales in December 2011 compared with December 2010, with the strongest growth occurring in South Australia (44.8%), NSW (up 15.6%) and Queensland (7.7%).

This follows AFG brokers writing $2.9 billion of mortgages in November, its highest such figure since March 2009.

AFG also found that as interest rates have fallen, non-major bank lenders increased their share of lending to close a quarter of all loans, compared with an average of less than 20% over the past year.

“This trend will help keep rates competitive as we move into 2012,” says Mark Hewitt, general manager of sales and operations at AFG.

“If the expected rate reductions come through over the next quarter, we could see a very different lending environment, supporting the recovery of property markets across Australia.

“The rate cut has certainly stimulated demand.”

Further cuts in the cash rate are expected to stimulate more first-time home buyers.

Of the 300 first-home buyers surveyed by real estate website realestateview.com.au, more than half (57%) listed interest rate hikes as a major concern. 

The survey found that only 20% of buyers thought it was a good time to buy their first property. 

Later today, ANZ will make its first interest rate decision out of step with the RBA.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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