Upbeat housing outlook lowers rate cut expectation

This week Anthony Richards, the Reserve Bank’s head of economic analysis, gave a relatively upbeat assessment of the state of Australia’s housing market. In his speech on the conditions and prospects in the housing sector, he suggested that the RBA’s aggressive approach to monetary policy to date was helping to protect home owners from the worst of the global financial crisis.

The RBA has cut interest rates by 400 basis points since September last year, bringing the official cash rate down to 3.25 per cent. Borrowing costs for home owners are now at 45 year lows and standard variable housing rates have fallen by about 375 basis points.

Richards said: "the recent significant falls in the cash rate are having positive effects on the economy and the household sector, and have contributed to a significant improvement in household cash flows and in measures of housing affordability for people paying mortgages or contemplating home ownership".

He noted that the fall in mortgage lending rates had significantly lowered the pressure on households, with the average debt servicing burden dropping by about five per cent.

The RBA clearly believes that the large rate cuts to date are still to work their magic through the Australian economy. They are expected to support greater home building activity later in 2009 and there are already signs that demand for housing finance is improving, particularly among first home buyers. According to the Treasury Department, Australian dwelling investment is expected to increase by 4 per cent in 2009-10.

This positive outlook for the remainder of the year has caused some market participants to lower their expectations for another cut when the Reserve Bank next meets on 7 April. Commentators are predicting the central bank will only make a small cut of 25 basis points, with rates settling at 2.5 per cent by July this year. The RBA left the official cash rate unchanged when it met earlier this month because it needed to assess how the economy is reacting to the series of cuts to date and the federal government’s package of fiscal stimulus measures.

Infochoice.com.au