I wish I had a $10 note for every time someone over the last week asked me (well, most “put it to me” to be honest) about how the rate drop would surely help the housing market. My response was, “Not necessarily”.
Here are a couple of observations.
Declining interest rates means that the economic outlook is weaker. Punters are usually more cautious as a result. Most will save the average $60-odd per month reduction in interest rather than spend it.
They are already doing this. Our higher saving rate is well documented, but exactly how it is being achieved doesn’t get much commentary. It is not just a simple case of saving more money. For the most part, Australians are saving more by repaying more than the minimum on their housing loans. Likewise, credit card holders are repaying their credit card loans faster than in the past.
So for mine, most mortgage holders will simply leave their repayments as they currently are and effectively pay off their debt faster. Surveys show that a high proportion of households think that repaying debt is currently the wisest place for savings. The Melbourne Cup interest rate drop helped consolidate this belief.
This is especially the case for those who like higher interest rates – pensioners and superannuants. The banks will drop their deposit rates, meaning these savers will have less income. Baby boomers, whilst they make up 25% of Australia’s population, represent 38% of our households and hold half of our residential assets. In fact, they hold 58% of our investment housing, in dollar terms. This segment is very cautious, and now even more so since last Wednesday.
The fact that we are paying off our mortgages faster is often ignored by the doom and gloom merchants who predict a repeat here of what occurred overseas, and continue to preach about the pending mother of all property crashes. Yet, according to AFG, the average new loan-to-value ratio is a comfortable 67% and the latest ABS figures show that house prices fell just 2.2% across the Australian capitals over the last twelve months. Yawn. And yet we keep on reading about mortgage stress and impending doom.
When interest rate falls (and rises) were large – back in the 1970s, 80s and even early 1990s – house prices would follow suit. When monetary policy adjustments are slight – as has been the case over the last decade or so – their impact on house prices is also slight. Fiscal support, as seen by the various machinations of the first home owners grant/boost for example, has had much more of an impact.
In fact, the introduction of the first home owners grant in 2000 and again, in 2008 when it was boosted, helped to stop residential market downturns. If the market was left to follow its natural cycle, we would not now be facing such a protracted slowdown in sales, starts and prices.
I think the RBA would like to see house prices stabilise and remain steady (i.e. no real growth) for some time; well, until wages catch up with house prices and affordability (a tricky concept to measure to be sure) is restored. The latest cut might achieve this, but if Europe continues to deteriorate and if China stumbles a bit, then further cuts are on the table.
Again, the aim here would be to put a floor under prices and to lift some fallen markets. It isn’t to fire-up price growth. If that starts to occur, rates will rise again.
I like to call the next phase of the residential property cycle “the big nothing” – a highly technical term which, in layman’s terms, means “limping along”. There is nothing wrong with taking a breather every now and then.
Taking this line of thought further – I do think it is much more realistic (and more healthy, economically speaking) to accept the current market conditions as the “new normal”. Waiting for the next big thing – a silver bullet per se – might be counterproductive and even dangerous.
Hey, don’t get too despondent. This is exactly what happened for much of the 1990s. And we all survived. Those who worked smarter and harder actually made some serious money. In every stage of the economic cycle, someone is hurting whilst another is partying.