Rate hold a missed opportunity to boost property

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Reaction to the RBA’s decision to keep interest rates on hold has come in thick and fast, with commentators labelling it as a missed opportunity to boost the property market.

The RBA was widely tipped to cut the official cash rate by 0.25% on Tuesday, and the bank’s decision to keep the rate on hold at 4.25% has caused quite a stir.

Residex CEO John Edwards has labelled the RBA’s decision as “a missed opportunity to boost sagging property markets”, adding that property markets around the country are at a tipping point.

“The property market is on a knife edge. A rate cut would have had an important impact on affordability and boosting confidence,” said Edwards.

“Most Australian borrowers are on variable rate loans so any change can have an immediate impact,” he added. “As housing is particularly rate sensitive, rate cuts can be an important confidence boost for buyers and sellers.”

With Residex data suggesting that last year’s dual rate cuts are starting to have an impact on the property market, Edwards suggested that confidence in the market may now disappear on the back of the surprise rate hold.

Why the hold?

Noting that the RBA cited improved conditions and sentiment in global financial markets and some progress around the European debt crisis as reasons to keep the rate on hold, ING DIRECT treasurer Michael Witts said that confidence in the Australian economy is largely led by offshore developments.

“If Europe continues not to deteriorate, and the US continues on its likely growth path, confidence in the domestic economy will continue to improve,” he said, adding that global growth will be driven by the US and Asia, rather than the European-Asian mix that’s dominated in recent years.

“Regardless of source, the bottom line for Australia is that global growth will continue, albeit, marginally weaker than previously expected. This will continue to underpin the high level of investment in resources and related sectors,” he said.

Another reason for the RBA to hold off on a rate cut, said Loan Market corporate spokesman Paul Smith, was Australia’s mid-range target inflation rate of 2.4%.

“We thought the RBA could have applied a 50 basis points cut this month, but they have taken a more cautious approach and still have plenty of room to move,” he said.

“While the fundamentals of the Australian economy remain quite strong and consumer sentiment has been improving, sections of the economy can only benefit from the stimulus provided by lower interest rates.”

Edwards added his voice to the rate cut cause, noting that a failure to reduce the cost of housing could have dire consequences for the property market.

“While Australia’s property market does not face the same risks as those that led to the collapse in US housing prices, we face continued headwinds including the high Australian dollar and the high cost of housing. We need to encourage home ownership otherwise we will arrive at a situation where the cost of rentals is unacceptably very high,” he said.

Were you hoping for a rate cut to ease the outgoings of your portfolio? Discuss the issue in the mortgage and finance section of our property investment forum.

More stories:

Westpac slow to adjust repayments

Banks talk tough on rate cuts

Banks may not pass on rate cuts

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