Lowest interest rate in 45 years to kick start investor activity

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The 1% rate cut, delivered by the Reserve Bank of Australia on 3 February and passed on fully by the major banks, will lure investors back into the property market, according to an expert.

Craig James, chief equities economist with CommSec, said the unprecedented rate cuts over the past five months translate to a massive improvement in cash flow for those who own a property, making property an attractive investment option.

"Since September, interest rate repayments on a $300,000 mortgage have fallen by over $8,800 a year, effectively representing a 15% pay increase for someone on the average wage. In after-tax terms, the boost is even greater, equivalent to an 18.5% lift in disposable income," he said.

The overall improvement in yields is also becoming appealing. The latest data from the Australian Bureau of Statistics showed rents rising by 8% over the past year - the fastest pace in 19 years.

"Investors will lessen weight on cash investments in the coming months, moving more funds into the share market and property market. High returns on property investments are more compelling than cash," said James.

In addition to the rising rental returns, property values are also expected to improve amid continuing drop in building approvals. Dwelling approvals fell by 2.9% in December. In annual terms, the value of building approvals fell by 38.3% in December - the weakest reading in 18 years, according to CommSec.

"Unless more housing stock comes onto the market, a major lift in the demand for new homes could merely serve to boost prices," said James.

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