After two consecutive rate cuts, experts are expecting more cuts before the end of the year, ultimately impacting the current credit environment. How will investors be affected by the changes in the official cash rate?
Following the rate cuts in June and July, which brought the official cash rate to a new record low level of 1.0 per cent, Dr Shane Oliver, chief economist of AMP Capital, predicts another rate cut in November and in February next year.
Several factors have weighed down on consumer spending over recent times, according to him, including high underemployment, weak wage growth, the housing downturn and an overall slowdown in economic growth.
“We have slowed down… We’ve got 13.5 per cent of the workforce either unemployed or underemployed, the housing downturn in Australia, with housing construction slowing in particular. That’s all weighing on consumer spending and that’s led to a slowdown in growth in the economy,” Dr Oliver highlighted.
“That’s what the Reserve Bank is moving against… We’ve started cutting rates. Our cycle is a little bit different [from] the US cycle because, I think, the case to ease in Australia is a lot stronger than in the US.”
What will be the likely impact of this new rate-cutting cycle on the property market?
Will two to four rate cuts create another property boom?
For Dr Oliver, things might just work out differently this time but ultimately, rate cuts will help ease the tightening in the credit market and, thus, assist in the improvement of overall investment activity across the country.
“Look at the auction clearance rates in Sydney and Melbourne. We were at a low of about 45 per cent in the run up to Christmas last year. Now, we’re running around high sixties, low seventies in terms of the finalised clearance rates. Rate cuts do help,” he said.
The conclusion of the federal election brought back the confidence in the market as uncertainties around negative gearing and capital gains tax were eliminated, particularly with regards to changing the rules under a new government.
With the Liberal party winning the election, those who stayed away from the property market out of fear for a significant drop in prices are slowly getting back, hopeful about the eventual stabilisation of the market, particularly the capital city markets that have faced downturns recently.
Further, the easement of rules on loan serviceability assessment has also lead experts and investors to believe that the property market is indeed heading to “a state of stability”.
According to Dr Oliver: “What’s happened in Australia is that we had that run up into the election, a lot of nervousness about a new government changing the rules around negative gearing, capital gains tax. Most of the estimates I saw suggested that could knock 10 per cent off property prices in Sydney and Melbourne.”
“A lot of investors stayed away for that reason and then, suddenly, we had the miracle election, as the Prime Minister called it. Labor didn’t win. All of those people who were thinking, ‘This is going to be the beginning of the end of the property market’, sort of changed their view pretty quickly.”
Together, the conclusion of the federal election, the interest rate cuts and the easement of rules on loan serviceability assessment will act as a “trifecta” that is expected to spur positive change across the property market.
“You can debate the importance of all of these things. Maybe each of them will not have a huge impact, but when you put them together, you could get quite a significant impact there,” he said.
“Yes, there’s still negatives going through the economy, constraints that are still there, but this positive ‘trifecta’ has ultimately helped stabilise the property market.
“Over the last few months, we’ve seen property prices, on national average, stabilise. In fact, in Sydney and Melbourne, they’ve now increased very slightly, according to CoreLogic, for the months of June and July, around 0.1 to 0.2 per cent. Nothing huge, but they’ve gone up for the first time in a long time, so that’s good news.”
Still, despite the positive movements in the market, Dr Oliver believes that the performance of the market will not be as strong as the last property boom.
While house prices grew up to 10 per cent per annum during the rate-cutting cycle of 2011 and 2016, this time, growth could be a little lacklustre due to several factors that continue to hamper the recovery of some major markets.
For one, banks continue to implement tough lending standards, scrutinising the living expenses of loan applicants as part of the loan application procedure.
Dr Oliver said: “I don’t think we’re going to see strong growth this time around for several reasons. For one, banks are a lot tougher in terms of their lending standards.”
“Back then, we went into a period when… everyone’s getting an interest-only loan — around 45 per cent of the loans granted were interest-only. Now, it’s probably not going to happen again to the same degree since there’s a lot more focus on expenses on the part of borrowers, as well as income levels and total debt levels… APRA is still putting the pressure on there so it’s harder to get a loan today.”
Moreover, an imbalance in supply and demand has started to plague some of the biggest property markets across Australia.
“Back in 2011, there wasn’t a lot of construction going on. Now, there are cranes all over the place, so there’s a lot more supply to hit the market. That’s a big difference compared to the past,” he said.
Finally, there’s the ongoing recovery of the NSW and Victorian economies after coming out of a long and difficult period that succeeded the mining boom.
“The mining boom helped support their property markets. This time around, they’ve already been strong, so if anything, they might slow down a little bit and unemployment might rise a little bit,” Dr Oliver explained.
Tighter credit, greater supply and the possible rise in unemployment are the three main reasons why the economist believes that the property market’s growth could be a little more constrained this time around, despite the ongoing rate-cutting cycle.
Over the next 12 months, Dr Oliver expects to see price gains, but only in the “low single digits”.
According to him: “Of course, it will always depend on the area you’re in. There’s going to be a lot of variation around that.”
“But I’d say just expect low single digits and don’t look at the relationship between clearance rights and house prices and say, ‘Oh, I’d probably get 10 per cent growth — that’s what’s happened in the past given where clearances are now.’ I don’t think that’s likely. I think low single digit price gains are more likely.”