Reserve Bank of Australia drops cash rate to historic low of 0.1% which fuels property market

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The Reserve Bank of Australia (RBA) drops cash rate to historic low of 0.1% which fuels property market

Historically cuts to interest rates have fuelled housing market activity and generally put upwards pressure on dwelling prices.

The value of housing has increased nationally for the first time in five months by 0.4% in October, and the latest lending figures have revealed that housing finance in September was 26% above that of 12 months ago.

The number of construction home loans has increased by 64% since May, almost double that of other owner-occupier loans.

Corelogic head of research Tim Lawless said the central bank had looked through the ‘noise’ of higher housing prices in an effort to stimulate business investment, jobs growth and household consumption.

“The stimulus of such extremely low-interest rates, together with the initiatives announced in the federal budget and state-level incentives like stamp duty concessions and building grants, are likely to be enough to outweigh the headwinds facing the market.

“If housing market conditions generate too much risk through rising prices, particularly in the lending space, policymakers might consider other mechanisms that will allow interest rates to stimulate the economy, but keep a lid on house price appreciation,” Lawless said.

The Reserve Bank of Australia (RBA) has dropped the official cash rate from 0.25% to the historic low of 0.1% with the RBA governor Philip Lowe saying that continued monetary easing would be needed for some time, in a bid to address weak household spending, rising unemployment and inflation.

Mr Lowe also said “In Australia, the economic recovery is underway and positive GDP growth is now expected in the September quarter, despite the restrictions in Victoria, but it will take some time to reach the pre-pandemic level of output.”

“Encouragingly, the recent economic data have been a bit better than expected and the near-term outlook is better than it was three months ago,”

“Even so, the recovery is still expected to be bumpy and drawn out and the outlook remains dependent on successful containment of the virus.”

In yesterday’s announcement, the central bank said it is not expecting to increase the cash rate for at least three years.

The RBA has also embraced quantitative easing to keep longer-term interest rates low in order to assist the recovery of the Australian economy.  GDP growth is expected to be around 6% over the year to June 2021 and 4% in 2022.

The unemployment rate is expected to remain high, but to peak at a little below 8%, rather than the 10% expected previously.

 For the first time since 2011, the RBA has declared a Melbourne Cup Day cut. The central bank has reduced the rate six times since 2016.

Source: ABS, REIQ, RBA, CoreLogic