The Reserve Bank has announced a 25 basis point reduction in the cash rate, to a new historic low of 0.25% and made it clear the cash rate will remain at this level until labour markets are moving towards full employment and inflation is tracking to be within the target range of 2-3%.
Under normal circumstances, such an extraordinary move from the
Reserve Bank might be greeted with renewed optimism towards housing
market activity.
Research from the Reserve Bank points to an inverse relationship with
changes to the cash rate and property prices; when interest rates fall,
housing prices typically rise. This was a significant factor in the
rapid value upswing in residential property from June 2019.
However the current situation of extreme uncertainty and economic
fragility makes it difficult to expect housing market activity to lift
against the historically low cost of debt.
As the coronavirus pandemic broadens, and the probability of an
Australian recession increases, consumer confidence is trending lower
from an already weak position. This will likely weigh on high commitment
consumer spending decisions, such as buying or selling a home.
The announcement from the RBA was driven by economic necessity. It is
aimed at keeping the Australian dollar low, ensuring borrowing costs are
stimulatory for businesses and households, and helping to stabilise and
capitalise credit markets. However, it is the same economic weakness
and uncertainty that is likely to keep consumer spirits low.
Thursdays’ decision is also significant, because 0.25% has also been
described by the RBA as the effective lower bound of the cash rate. The
effective lower bound is the point at which further reductions to the
cash rate will not encourage any further spending or benefit to the
economy.
This means the RBA has to turn to ‘unconventional monetary policy’. The policy announcement included:
- A yield targeting regime on three year government bonds aimed at reducing volatility and providing certainty across credit markets;
- Additionally the RBA has created a term funding facility for the banking system worth at least $90 billion with the objective of ensuring low cost funding is available for business loans, especially small to medium sized businesses;
- A 10 basis point remuneration of exchange settlement balances at the Reserve Bank; and,
- The RBA will also continue its elevated level of repurchasing or ‘repo’ operations “as long as market conditions warrant”, which will support liquidity to Australian financial markets.
From a housing market perspective, we are expecting housing may still be impacted from a slowdown in economic activity. However transaction activity is likely to suffer more, as buyers and sellers retreat to the sidelines until some certainty returns to their decision making. This has been the outcome through historic periods of negative economic shocks.
Of course this outcome is contingent on the impact from coronavirus only lasting several months; a more sustained economic downturn would likely see households struggling with higher unemployment and underemployment.
Considering that household debt levels are close to record highs, a material weakening in labour markets would likely see a substantial rise in mortgage arrears and distressed properties entering the market.
We do not expect this latest move by the RBA will increase housing demand while confidence levels are so weak and uncertainty is extreme.
However, in the long term we are expecting economic conditions will rebound from the pandemic-related slowdown through the second half of 2020.
At this stage, the low interest rate setting, along with improving economic conditions, a rise in sentiment, and release of pent-up demand from buyers and sellers, should provide a more meaningful level of stimulus to the housing sector.
For buyers who have the confidence and financial well-being to remain active in the housing market through this period of weakness, there could potentially be some good buying opportunities to secure properties at a competitive price and at ultra-low interest rates.
Tim Lawless and Eliza Owen
