Rate cut would silence 'doomsters' and improve already high affordability: CommSec's Craig James

Larry SchlesingerDecember 8, 2020

An expected cut in interest rates tomorrow will cause housing affordability to improve even further than its current eight-year high and should silence those housing “doomsters” forecasting big drops in house prices over the next few years, according to CommSec chief economist Craig James.

Writing in his latest Investor Signposts report, James notes that a “combination of rising household income and lower housing prices has meant that housing affordability is now at the best levels in over eight years (since 2003)”.

“Another interest rate cut this week will boost housing affordability even further. Where will that leave the doomsters? Basically with nothing to report,” he says.

The “doomsters” forecasting big drops in house prices include University of Western Sydney’s Steve Keen, who expects house prices to fall by between 6% and 10% in 2012 principally because mortgage demand is decelerating and the market has shaken off the effects of the “first home vendor’s boost”.

More dramatic predictions have been made by US self-described expert Jordan Wirsz, who forecasts a 60% drop in house prices over the next five year – claims that have been rubbished by Australian property market analysts.

James described the 3.6% drop in property prices in 2011 (as recorded by RP Data-Rismark) as a “soft landing” after growth of 5.1% in 2010 and 12.1% in 2009.

“Prices were pumped up in 2009 by super low interest rates and government incentives for first home buyers, so a correction was clearly on the cards as demand and supply moved into balance,” James says.

“And at the end of 2011 it looked like the correction was nearing completion with prices up 0.4% in November and easing just 0.2% in December.”

James also notes that despite the fall in dwelling prices, “total return on dwellings grew by 0.8% in 2011, out-performing shares with the All Ordinaries accumulation index sliding by 11.4% over the year.

“But returns varied from +4.5% in Sydney to -2.3% in Melbourne.”

Speaking on ABC’s Insiders program yesterday, Federal Treasurer Wayne Swan also highlighted improved housing affordability and said cheaper interest rates were saving borrowers about $3,000 per year.

Swan noted that the cash rate currently sits at 4.25% compared with 6.75% when the Labor government came into power.

“If you look at the last two interest rate cuts, somebody on a $300,000 mortgage is paying $3,000 a year less than they were paying when we came to government. So the fact is that the outlook out there is pretty bright.

“The fact is the economy is going along strongly but we've also seen rates come down, two rate cuts in a row, and there are good deals out there in the market,” he says.

Should the major banks not pass on the full rate cuts, they are likely to cop another verbal bashing from the Treasurer, who has dismissed banks’ cries over higher funding costs as highlighted by Westpac CEO Gail Kelly last week.

Swan says banks remain “hugely profitable and their net interest margins are back to where they were prior to the global financial crisis”.

A report in today’s Sydney Morning Herald highlighted Westpac’s slowness in passing on the November and December rate cuts, with some borrowers yet to see any repayment relief.

The bank claims it is helping borrowers “get ahead” on their mortgages – borrowers have to call the bank and ask for the rate cut to be passed on.

According to opposition spokesman Joe Hockey borrowers were $700 per year better off under the 12-year reign of the Howard government than under the current Labor government.

 



Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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