Will a record low cash rate put too much puff into property?
The Reserve Bank cut the cash rate by 25 basis points to 2.25% on February 2, taking the average discounted variable mortgage rate to 4.85%, the lowest cost of mortgage debt since July 1968.
While lower interest rates were seen as necessary to stimulate consumer demand, push the dollar lower and hopefully prop up economic growth, one of the risks of lower mortgage rates is the potential for a renewed higher level of capital gains across Australian housing markets.
Since rates started falling over the current cutting cycle in November 2011, capital city dwelling values have increased by 19.6%. Sydney has accounted for the vast majority of growth over the current cycle, with dwelling values up 30.9% between November 2011 and January 2015. The next best performing city has been Melbourne, with a 17.3% capital gain, and Perth, where values were up 15.7% over the same period. Most other cities have recorded relatively moderate conditions. Hobart values are up by just half a percent, Adelaide values are 2.4% higher and Brisbane has seen growth of 10.8%.
While lower rates are likely to be stimulatory, the stimulus may not be as influential on housing market conditions as what we have seen in the past.
Lower consumer confidence, stricter serviceability requirements for borrowers, tighter lending conditions for investors, affordability challenges and low rental yields are all factors that may contribute to the ongoing moderation in housing market conditions over 2015.
Regulators are becoming much more vigilant around the pace of investment lending and lending standards overall. In their recent statement following the interest rate decision, the Reserve Bank highlighted that they would be working further with the banking and finance regulators to ensure appropriate lending standards were in place and being adhered to.
Investors are likely to face tighter lending conditions as Australia’s banks work to keep within the Australian Prudential Regulation Authority (APRA) guidelines of keeping growth in the value of investment loans below 10% per annum. Data from the RBA showed that housing credit to investors across the market rose by 10.1% in 2014, indicating some institutions are already growing their book by more than 10%.
The challenge for the Reserve Bank is to stimulate stronger economic growth without over stimulating the housing market. Residential construction is one of the key economic pillars the RBA is hoping will strengthen as mining related investment continues to ease. If dwelling approvals are anything to go by, the residential construction pipeline will continue at a strong pace in 2015 following a record high 201,025 dwelling approvals in 2014
The ideal outcome for the Reserve Bank under the new interest rate setting would be that housing market conditions continue to moderate back to more sustainable levels, but housing demand remains strong enough to keep dwelling construction at the current high levels and new home sales relatively high.