After two successive rate cuts investors are still unwilling to step back into the market. Many, writes Shane Oliver, are even now smarting from the effects of the GFC
In the past, one would assume that if the Reserve Bank cut rates then the banks would follow suit.
That relationship, however, is nowhere near as close as it was, say, four years ago, with the gap between the cash rate and the mortgage rate already one per cent higher than it was prior to the global financial crisis (GFC).
If in the past that ‘link’ was an informal one, the banks have now come out and said formally that it’s now broken.
They’re not even going to move on the same day and some banks have said they will wait ten days before they make changes to their rates.
That meeting will be a general review of interest rates and could therefore mean moves notwithstanding the Reserve Bank’s decision on the Tuesday of the week before.
I think at the end of the day it’s probably not going to have a huge impact on the level of interest that investors pay, however.
The reason I say this is that the Reserve Bank is conscious of what the banks are doing and ultimately it’s the mortgage rate that the Bank is interested in.
So, if the central bank cuts the cash rate and the banks don’t follow suit and consequently the Reserve Bank doesn’t get the mortgage rate it wants to serve its economic purposes, then the Bank will just have to cut it again.
We’ll still end up with the mortgage rate the Reserve Bank wants us to have but there will be a little uncertainty as to the time at which we will get there. I think that’s the big change here.
I also think that buyers will remain cautious and it will take a few more rate cuts to get them back into the market.
If you look back to the 2008/2009 situation, the mortgage rates started to fall in September 2008 to about 9.5 per cent and then we saw some huge cuts later on that saw rates come down very quickly.
But it wasn’t until we got into the fives in the March 2009 quarter that buyer demand started to improve.
You’ve got two things going on here.
People will remember from that time that first off, you need interest rates to come down sufficiently to offset negative sentiment, uncertainty stemming from the economic problems of the moment and people being cautious.
We only just recently saw consumer sentiment fall by 8 per cent for the month of December and despite talk of any rate cut, they still weren’t happier.
The second thing is that investors and homebuyers will be wary that if they rush in on the back of bank incentives they might then find that those incentives just drop away and they end up with much higher interest rates.
Some buyers found in 2009 that they rushed in with state government assistance and very low mortgage rates at the time but then, a year later, found they were paying much higher mortgage rates. So, it might actually take a bit longer to get the housing market to turn around again.
We’re probably looking at another six months of weak house prices.
I also think the rebound this time will be far weaker than the 20 per cent high growth in house prices that we saw going into early 2010, which was an unbelievable surge.
I think governments might be a bit slower to reintroduce a stimulus this time around.
Shane Oliver is AMP’s chief economist
Your enquiry has been sent to a local Aussie Mortgage Broker.
We will be in contact with you shortly.
- Give expert mortgage advice to help you find great investment loan deals
- Help you maximise return by lowering financing costs
- Save you time and effort by helping with the paperwork