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Australia’s Rate Cuts Impact on the Property Market

By Kenn Leong

Recently, the Reserve Bank cut rates and in doing so, has taken the official cash rate to a new record low of 1.5%.

The question that remains however, is if this cash rate affects the property market? And if so, how so…

The reality is that for those who already have loans, this isgreat news, because it makes their repayments cheaper, but for those without and anyone else looking to get involved in the property market, the impact of this rate cut on the market itself is probably going to be minimal. But let’s review the facts:

What’s interesting to note is that the big four banks are actually not passing on the rate cut… well not in full anyway.

The National Australia Bank is only cutting home loan rates by 0.10%. ANZ is cutting its rates by 0.12% which is a little better and The Commonwealth Bank is cutting home loans rates by 0.13% and finally, Westpac cut their rates with principal and interest payments of 0.14% while the with interest only loans will receive a 0.10% cut.

It’s interesting to note the similarity in figures but still its effects on the property market are essentially tiny.

Another thing to note is the criteria required in order to actually lend from banks for property investments. The requirements themselves make it harder and harder for people to buy more property in most cases and the rate cut is not going to make borrowing money any easier. Even if you do have the criteria, most of the time banks will calculate your existing repayment obligations at the long term average interest rate, which is between 7% and 7.5% to decide whether or not you can afford a loan at all.

As well as this, rate cuts at the end of a booming period are far less evident and impactful than at the beginning or during a boom when there is momentum in the market place and both sellers and buyers are looking to get involved.

“It’s at a time like this when sellers tend to reduce their prices in order to make a sale and price growth is continuing (even though it’s at a slower rate with fewer listing on the market.) The reason for this is that sellers are feeling less motivated but irrespective, buyer demand and clearance rates are still quite high. In the 12 months to July 2016, Sydney’s average annual rate growth was actually 9.1%.” said Craig Pontey, Director of Ray White Double Bay.

So what does this all mean? It means that rate cuts (for those who already own property) are a very good thing for the property market – no matter how small the cuts may be.

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