Rate drops unlikely til May as RBA sees no US-style crash

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The RBA is expected to keep the official cash rate on hold until at least May, according to a poll of leading economists.

The latest Bloomberg interest rate survey found that all 23 economists that were asked for their views on the RBA’s movements expected the bank to hold fire for the next two months.

This would leave the official cash rate at 4.25% until May, when 16 of the 23 surveyed economists expect a drop of 0.25%. Fourteen of Bloomberg’s panel of 23 expect a further 0.25% rate cut in June.

But before property investors start counting on rate relief to come their way as winter kicks in, it’s worth noting that the decision makers at the RBA have sprung a few surprises in recent months. Only a handful of economists successfully predicted last month’s 0.25% rate cut, for example.  

No US-style property crash

The news comes on the back of the head of the RBA’s financial stability department Luci Ellis’ claims that Australia will avoid a US-style real estate crash.

“I would like to stress that Australia, like many other countries, does not have the ingredients needed to create an outcome like that in the United States,” she said in a speech at the recently held Australian Mortgage Conference 2012.

She added, however, that to avoid a crash mortgage lenders must continue to avoid the temptation to relax their lending standards to the levels that were seen in the US before the subprime mortgage crisis kicked in.

“Much has been written on the causes of the crisis and the housing bust that sparked it, including by me. The causes are complex, but I think they can be boiled down to three things: lax lending practices, lax lending practices, and lax lending practices,” said Ellis.

“Lending standards eased in the United States far beyond what was seen in other countries over the boom period.”

Other factors that have seen the Australian property market keep its head above water, according to Ellis, include:

  • Australia never saw the explosion of zero-deposit loans, or 125% loans, that were seen in the UK.
  • In recent years, around two-thirds of new mortgage borrowers from banks had an initial LVR of below 80%.
  • Lending practices are more strictly supervised in Australia than in the US. Most mortgage lending is done by firms that are prudentially regulated and, unlike in the US, there is only one prudential supervisor – APRA.
  • Many Australian households pay their mortgages down quite quickly. Estimates vary, but it seems as many as half of owner-occupiers with mortgages pay it down faster than the contract requires.

Australia vs the world:

Source: RBA

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