A global interest rates guide as China rate cut to flow through to Australian property market

The Australian economy, the resources sector and housing markets tied to the boom are all set to reap some benefit from China cutting interest rates for the first time in four years.

For the first time since 2008, the People’s Bank of China cut its one-year lending rate by a quarter of a percentage point to 6.31% in an effort to stimulate economic growth.

It comes as the average rate for a 30-year mortgage in the US dropped to its lowest level since 1971, and the Australian cash rate is also just off record lows.

The Chinese central bank has also relaxed borrowing rules for banks, allowing them to offer a 20% discount on the lending benchmark, up from the previous 10% discount.

The deposit rate was cut from 3.5% to 3.25%.

Westpac's weekly Phat Dragon reports says rate cut will allow banks to offer more attractive rates to prospective borrowers, "while being forced to take a view on the competitive landscape for deposits".

"That has margin implications of course - but that is the point. If the authorities wished to jolt the financial sector back onto a commercialisation trajectory (and Premier Wen’s strident rhetorical attack on the banking ‘monopoly’ points decisively in that direction) making them think for themselves...is a very good start," says Phat Dragon.

China relies on Australia for around 5% of its exports, mainly in the form of its mineral resources.

Source: Savills

Iron ore prices have risen 700% and coal more than 400% between January 2003 and February 2012 in line with China’s massive expansion and urbanisation.

Click to enlarge

Source: Savills

The rate cut will also stimulate the Chinese housing market, which has a very high rate of home ownership (89%) and massive urbanisation, with around 16.5 million people moving to the major cities every year.

About 670 million of China’s 1.3 billion population currently live in urban areas.

According to James McDonald, associate director of China research at Savills, Chinese banks are not as heavily exposed to the property market as Australian banks and other world banks because of low gearing ratios.

Banks require a deposit of between 30% to 40% from borrowers and a 60% deposit for a second home, he says.

The latest rate cut is designed to encourage more borrowing and investment and raise the current rate of GDP growth of around 7.5% back closer to around 8%.

In addition, many of China’s 875,000 US dollar millionaires have property investments in Australia.

The last change to the borrowing rate was in July 2011 when the one-year benchmark lending rate was raised by 25 basis points to 6.56%

The global interest rates you need to know:

3.68%

The average rate for a 30-year mortgage in the US, the lowest it has been since 1971.

3.59%

The cheapest five-year fixed-rate in the UK offered by the Post Office

3.5%

The cash rate as set by the RBA

2.3% to 3%

The average mortgage rate in Spain

1%

The current official interest rate in the eurozone

0.5%

The current base cash rate as set by the Bank of England

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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