The cut in official interest rates brought them to the lowest level since the early 1960s. It was a move expected by many but perhaps not welcomed by all.
Cutting rates recognises the fragile state of our economy that could further unnerve consumer confidence. It is hoped that the rate cut will give that much-needed stimulus to business investment and consumer spending.
In his announcement, Reserve Bank governor Glenn Stevens acknowledged the Board wanted to “reinforce recent encouraging trends in household demand”. That’s a worrying thought considering the low wages growth.
There is only so much the RBA can do to repair economic growth back to trend. It really lies now with the state and federal budgets.
Low rates tend to attract higher activity levels putting upward pressure on price. The booming Sydney market and issues of affordability must be addressed. The Domain Group reported Sydney’s median house price is now $914,056 and could be set to hit over $1 million by the year-end. Regulators need to find ways to turn this market down a gear, whether that be through limits on negative gearing, foreign investment or cashed-up self-managed super funds.
An unaffordable property market is unsustainable and out of reach for many Sydney residents. The RBA did state they are closely monitoring the housing market “working with regulators to assess and contain risks”.
But it is important to remember that trends throughout the capital cities have been varied. While regulators need to act fast to contain the Sydney housing market, other cities such as Brisbane, Canberra, Hobart and Perth breathe a sigh of relief.
Borrowing is more affordable as many of the banks were quick to pass on the majority of the rate cut. Lower rates help to make repaying a mortgage that little bit easier and faster. Not only does this make upsizing more affordable it should encourage tenants to become first homebuyers, of which numbers have been dwindling. Savings? As rates fall it is becoming more illogical to save, making other forms of investment more attractive. Property investment perhaps one.
Remember low rates cannot remain; it is only a matter of time before we see increases. It is all too tempting to over-extend yourself. If your debt levels are high try to use this as an opportunity to pay off a mortgage sooner rather than borrowing more. Repayments may be affordable now but will they be when rates rise?