Three years after last reducing the official interest rate, the Reserve Bank of Australia has announced a widely-predicted cut to 1.25%.
Most analysts predicted the RBA decision to lower the official cash rate by 0.25 of a percentage point at its June board meeting after RBA governor Philip Lowe all but confirmed it last week.
Many expect a second rate drop in August, and some expect more. Westpac chief economist Bill Evans last week forecast three reductions in the official interest rate in the next 6-7 months.
Buyers’ agent Kate Hill of Adviseable says the RBA decision delivers “a quadruple effect for real estate markets on top of the trifecta of the election, the end to Labor’s negative gearing policy and APRA’s easing of lending criteria”.
“It will certainly liven things up a bit,” Hill says. “Undoubtedly it will inject life into the sluggish housing markets in Sydney and Melbourne while remembering there are many markets elsewhere in the country that aren’t sluggish at all.”
Property adviser Danny Buxton of Triple Zero Property says there are now increased levels of positivity and activity in real estate.
“The positive changes from the past two weeks mean it’s a great time for people to re-assess their goals and get expert advice,” Buxton says. “The APRA changes and the downward trend in interest rates make it more affordable for people to enter the market. People who were struggling to get over the line with lenders before are now in a position to do something.”
The most pressing question is whether banks will pass on the full rate cut to borrowers, after pocketing more than 1% of the 3.25% of RBA rate cuts since 2011. Realestate.com.au chief economist Nerida Conisbee says there has not been an RBA rate cut since 2016 and there is an expectation that the full 0.25% reduction will be passed on.
“People are feeling pretty negative towards the banks after the royal commission,” she says, adding that banks will want to “improve consumer sentiment towards them”.
AMP Capital chief economist Shane Oliver also believes banks will pass on all or most of the RBA cut to customers, but RateCity research director Sally Tindall isn’t so sure.
“The last time the RBA cut rates the big banks passed on just under half,” Tindall says. “I’m not expecting them to pass it on in full.”
Most economists expect the official cash rate to drop further to 1% in August. Two RBA cuts mean average mortgage customers are likely to save at least $100 a month on their repayments.
“It will be common for us to see home loan rates with a 2 in front of them by the end of this year,” Tindall says.
Greater Bank became the nation’s first bank to do this last week when it announced a one-year fixed rate of 2.99%.
People with variable rate mortgages — particularly new home loan customers — are the biggest winners from rate cuts, which lower their cost of borrowing.
On the flip side, those saving for a new home will receive a paltry return on their bank deposits, while retirees who rely on cash in the bank will also suffer
Conisbee says the rate reduction will have a positive effect on the housing market, with history showing that cuts have an immediate effect on search activity on realestate.com.au.
“It gives people more money to buy and more confidence in the market,” she says.