Lower interest rates pose risk to property

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The interest rate cut of 0.25% from the Reserve Bank of Australia may help in increasing property values, but it does not signal a positive result in general, according to Domain Economist Trent Wiltshire.

The central bank lowered the cash rate to 1.25% a week ago, and economists predicted that there would be more rate cuts in the next six to 12 months. The news came after Coalition's win in the national polls, which paved the way for the scrapping of proposed changes to negative gearing. In addition, the Australian Prudential Regulation Authority (APRA) recently announced plans to loosen the serviceability buffer.

Wiltshire acknowledged that a smaller cash rate results in a rise in property prices; Labor's proposals would have pulled prices lower than they are; and APRA’s proposal will increase borrowing capacity for some investors.

 “These changes will probably encourage investors who have been deterred by declining prices back into the market. First-home buyers are also likely to think about buying if price falls end, with the government's first-home buyer scheme potentially encouraging people to buy,” he told Your Investment Property. “The early signs post-election are that clearance rates have increased, more people are attending open-for-inspections and considering taking out a home loan.”

However, the economist warned that the rate cut is an indication that the property market is not in its best state.

“But overall, lower interest rates are not good news; it means the economy is slowing. The risk is that the economy will slow further, and unemployment will rise, which is not good for the property sector. Additionally, lending conditions remain tight, and household debt levels are high, so lower interest rates won’t likely result in a big turnaround, but it's looking more likely we'll see prices bottom out in 2019,” Wiltshire said.

While the rate slash might enable prospective investors to enter the market, the process would still be difficult.

“The RBA cut and the likelihood of further cuts, in combination with APRA's proposed changes to lending rules, will enable many investors to borrow more. With another 25-basis-point cut, many investors should be able to borrow about 10% more than they did at the start of 2019,” he said. “Lending conditions do, however, remain tight, and banks are still assessing borrower expenses very closely. For those with a home loan, lower interest rates will make it easier to meet mortgage repayments.”

 

Top Suburbs : newtown , wiley park , emerald , toowong , marrickville

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