On the up: What will higher interest rates mean for real estate investors in New Zealand and further afield?
The Land of the Long White Cloud is shaping up to raise rates and the country may well be a bellwether for the Australia...
The Reserve Bank has released the outcome of its monthly board meeting for July, following widespread expectation of more rate cuts.
The RBA today decided to cut the official cash rate to a new record-low level of 1.0 per cent.
Most of Australia’s economists and industry representatives were expecting a cut, according to comparison website Finder and its panel of respondents, with 68 per cent accurately predicting the move.
While the cash rate moved to its new record low last month (when it moved to 1.25 per cent), it is now at a new all-time low with anticipation building for a further rate cut later this year. According to Finder’s panel, 85 per cent of respondents predict the cash rate to fall in August.
Graham Cooke, insights manager at Finder, said the decision to cut the official cash rate for two months in a row was possibly due to June’s cut not being large enough to make a difference.
“The objective is to lower unemployment, boost wage growth and push inflation back to target. It’s clear that one cut isn’t enough,” Mr Cooke said.
“Frankly, two cuts might not be either, but it’s a step in the right direction and it’s great news for home owners. It’s two down and maybe one or two more to go.”
AMP’s Shane Oliver, who accurately predicted the rate cut, agreed with Mr Cooke’s sentiments and predicted that there would be more rate cuts coming soon.
“The June 0.25 (percentage point) cut has not been enough for the RBA to achieve its objective of lowering unemployment, boosting wages growth and pushing inflation back to target,” Mr Oliver claimed.
“More rate cuts will be needed.”
Cameron Kusher, research analyst at property data provider CoreLogic, also accurately predicted that interest rates would fall and – like Mr Oliver – also sees more cuts coming soon.
Today’s decision, however, had nothing to do with the property market and was more focused on the economy at large, he said.
“In fact, the ongoing slowing of the rate of decline in dwelling values throughout 2019 and the recent uptick in Sydney and Melbourne dwelling values would likely have reduced concerns of further wealth erosion from housing,” Mr Kusher said.
“Furthermore, the 25-basis-point cut in June along with the cut today and the likelihood of reduced serviceability buffers from APRA are likely to be further positives for the housing market and encourage an ongoing gradual levelling in the housing downturn nationally.”
When combining last month’s rate cut with this new rate reduction, mortgage holders can expect to see a considerable amount of savings, Mr Cooke said, especially if lenders pass on both cuts in their entirety.
“On an average mortgage, if your bank passes on both rate cuts in full – that is a 50-basis-point reduction – you could be saving almost $42,000 over 30 years,” Mr Cooke said.
However, Mr Kusher warned that those trying to acquire new loans might find the process increasingly more difficult.
“Despite these positives, the introduction of the Banking Code of Conduct and the expansion of Comprehensive Credit Reporting from the beginning of July will ensure that although taking out a mortgage may become a little easier, the scrutiny on loan applications will remain significantly greater than it has been in the past,” he said.
This is an issue that John Kolenda, managing director of mortgage aggregation company Finsure, has also noted.
“We have seen a dramatic reduction in borrowing capacity for consumers with many being disheartened by the scrutiny of the major banks in analysing their expenses and activities,” he said.
“The average consumer qualifies to borrow 20 per cent less now than 12 months ago and the criteria varies drastically across lenders.”
Mr Kusher added that a recovery in the property market is expected to be a drawn-out process, even with lowered interest rates.
“No doubt attention will now turn to mortgage rates and how much of the cash rate cut will be passed through to mortgages,” he said.
“Our expectation is that banks will be holding back on passing on the full cut as they seek to balance out mortgage rates with deposit rates and protect net interest margins.”
Unlike last month which saw many lenders moving quickly in to pass on some or all of the rate cut, lenders have been cautious this month to pass on any cuts.
The first of the major banks to announce a cut was ANZ, which passed on a full cut for home and residential investment variable rate loans and is effective from 12 July.
Following this was CBA, which passed on a cut of 19 basis points for principal and interest repayments on variable rates and the whole 25 basis points for both investors and owner-occupiers on interest only repayments from 23 July, as well as a five month term deposit rate increase of 20 basis points to "balance the benefits and costs of further interest rate cuts between home loans and savings customers", according to a statement made by CBA on Twitter.
NAB was the third major bank to reduce its variable rates by 19 basis points and will come into effect from 12 July
Westpac was the last of the major bank to reduce variable rates of 20 basis points for owner-occupiers and 30 basis points for investors on interest-only repayments.
Athena passed on the rate cut as of 2 July, with investor rates starting at 3.49 per cent per annum for variable principal and interest loans and 3.45 per cent per annum for comparison rate loans.
Resimac's cut is applicable for its Resimac Prime and Resimac Specialist loan products and State Custodian's cut is applicable for its Low Rate Home Loan, Breathe Easy, Peak Performance, Standard Variable and Specialist products. Both non-bank lenders will enact their cuts from 24 July.
However, property investors who also depend on interest from their savings accounts are seeing unfavourable conditions, with retirees in particular feeling the effects, Mr Cooke noted.
According to Finder data, Australians have $526 billion in saving accounts Australia-wide. The 50-basis-point reduction from the last two months would represent a loss of $2.6 billion in interest over a year, with a drop of 75 basis points representing $3.9 billion less.
“So far, many of the top high-interest savings accounts have reduced their rates and some have even dropped by more than the 25-basis-point cut from June, such as Suncorp Growth Saver and CommBank NetSaver,” Mr Cooke said.
“It’s a timely reminder to stay on top of your savings account and see if you could be getting a better deal – especially as high rates will be harder to find.
“But remember, don’t make a decision based on rate alone – always factor in the home loan’s features and whether these fit with your goals and lifestyle so you’re not stung down the track.”