Low rates buoy housing market — expert

By Gerv Tacadena | 04 Jun 2020

The low-rate environment will continue to support the housing market as it grapples with the economic impacts of the COVID-19 outbreak, according to experts.

Tim Lawless, head of research at CoreLogic, said the Reserve Bank of Australia's decision to maintain the cash rate at 0.25% in its monetary policy meeting this month would help keep mortgage rates low.

"The low cash rate setting is one factor helping to support housing market conditions. Owner-occupier mortgage rates are averaging less than 3%, and the most competitive rates are close to the 2% mark," he said.

In its statement, the central bank said the board will not increase the cash rate target until unemployment and inflation targets are met. Lawless said this indicates that the cash rate will likely to remain low for several years.

"A lower cash rate isn't likely to provide additional support to the economy. Higher rates are also off the table, at least until inflation is back around the target range and labour markets significantly tighten. Both of these factors are likely to be several years away," he said.

Also read: Will Property Prices Fall?

Shane Oliver, chief economist at AMP Capital, said low mortgage rates are keeping interest costs as a share of household income well below historic highs.

"Low mortgage costs also make the funding costs for an investment property very low," he said.

Oliver said support measures from the government provide a substantial boost to household income, helping prevent a material increase in mortgage delinquencies and force sales.

Lawless shared similar sentiments, adding that banks' support to their borrowers in the form of repayment holidays and extension of interest-only periods would help boost consumer sentiment.

Furthermore, he said that the low costs of debt, the improving consumer sentiment, and the easing of COVID-19 restrictions have resulted in an improvement in housing activity in May, reversing the significant slump in April.

"The low rate setting and improving level of market activity also partially explain why housing values have fallen by less than half a percent through the COVID-19 crisis to date," he said.

Still, there are potential factors arising from the COVID-19 outbreak that could result in worse price declines in the coming months. Oliver said high unemployment is one of the most crucial factors.

"We have long regarded the combination of high house prices and high household debt as Australia's Achilles’ heel, and so we feared back in March that a large rise in unemployment could trigger debt-servicing problems, forced sales and so sharp falls in prices," he said.

Oliver believes that once support measures from the government end later this year, unemployment could hit as high as 8% and stay there for a long time.

"This, in turn, is likely to lead to some increase in mortgage defaults as bank payment holidays end, boosting forced sales and act as a drag on property demand," he said.

A decline in immigration is also expected to weigh down on the housing demand.

Of all capital cities, Sydney and Melbourne are likely to take the brunt of a possible price decline, as they are more exposed to the slowdown in immigration.

"This may be seen as a reasonable outcome in terms of making housing more affordable but without posing a big threat to the economy at the same time," he said.

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