After months of waiting, it’s official: the Reserve Bank of Australia finally cut its official interest rate by 0.25% to a record low of 1.25% following their board meeting on June 4.
Although it’s the first change to interest rates in nearly three years dating back to August 2016, everyone knew it was coming after RBA governor Philip Lowe foreshadowed rate cuts in a speech last month; it was only a matter of when.
Commonwealth Bank and NAB will pass on the 25 basis point cut to both owner-occupiers and investors, however ANZ announced they would only be reducing their rates by 18 basis points while acknowledging this would leave some customers disappointed.
A slowing economy, a cooling property market and weak consumer spending forced the RBA’s hand into cutting its rates in hopes of encouraging greater borrowing and spending in such trying times.
How the economy reacts to this rate cut will determine when the next one will occur, with many experts predicting the RBA will slash rates by a further 0.25% at least by year’s end.
The decision to cut rates is set to be a positive one for the Aussie property market that has been floundering for the better part of the last two years following a period of monumental price increases.
Governor Lowe, however, was cautiously optimistic about the ramifications the cuts would have on the housing market in his official statement.
“The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities,” he wrote.
“Conditions remain soft, although in some markets the rate of price decline has slowed and auction clearance rates have increased. Growth in housing credit has also stabilised recently.”
Research conducted by comparison website Finder reveals the true impact the rate cuts will have on the average Australian.
They found the average home loan size of $384,000 will increase following the cut as it has following 8 of the last 10 cuts, while a reduction of 25 basis points to the average variable rate to 4.66% would result in savings of almost $700 per year – or $21,000 over the life of the loan.
“In recent weeks we’ve seen auction rates bounce back in many states for the first time in months,” said Finder insights manager Graham Cooke, describing the current cash rate as “unchartered territory.”
“With interest rates dropping and loans becoming both cheaper and easier to attain, this could very well be the turning point for the slumping housing market.
“However, these previous cuts occurred in environments where house prices were increasing, so we’ll have to wait and see how the market responds this time,” said Cooke.
Former NSW premier Mike Baird who is now NAB’s chief customer officer for consumer banking backed the RBA’s decision to slash rates, saying their customers deserve it at a time where the cost of living is “challenging.”
“We strongly believe reducing rates is the right thing to do by our customers and reflects our focus on earning trust in the community and rewarding our loyal existing customers,” Baird said.
The hope of a boost to the property market stems from the events of the past, with recent RBA research revealing house prices rise by approximately 8% in the two years following a 1% cut in rates.
While it’s yet to be seen how the Australian market will react to the RBA’s cuts this time around, the likelihood of an overall improvement in the market through increased borrowing and rising house prices is high.
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