June 12, 2014 by Craig Pontey
Each year after the June long weekend our thoughts start to turn towards the end of another financial year, and for individuals and business owners alike our thoughts also turn to what prospects the coming financial year might hold.
One key factor for many people will be the direction of interest rates. This time 12 months ago, some commentators had started to suggest that about now we would see firmer signs of a possible rate increase in the later part of 2014. That prospect now looks unlikely, and as a result anyone with a mortgage will be pleased, and we could be well into 2015 for any signs of a rate rise.
Stable Rates The Norm
I have to admit that when looking at the Reserve Bank of Australia stats I was somewhat surprised to observe how stable rates have been for a very long time. Let me start with some very interesting facts to demonstrate my point.
Between Feb 2008 and June 2014 there have only been a total of nine rate increases, with 14 cuts, mainly during the period of the GFC, and 48 months where there were no changes at all.
Then by comparison between Feb 2002 and December 2007 there were no rate cuts at all, but there were 10 rate increases, and 56 months where there were again no changes to rates at all.
What this shows, with little need of closer investigation is the reality that for a majority of time since 2002, our local cash rates have been remarkably stable. Official rates do not change all that often and so might this indicate a disproportionate level of analyse of rates, by comparison to the attention we give other key economic indicators.
Are Rates That Important for The Residential Market
Between 2002 and 2014 there were no changes to interest rates for a total of 104 months and I think this demonstrates the importance of stability. While not often expressed as such, given these figures it is reasonable to conclude that rate movements either down or up ‘unsettle’ the market.
If you have a long memory you might recall that between January and July 1990 interest rates peaked between 17.5% and 15%, another peak rate was well below those levels at 7.25% in August 2008. Then from September 2008 after a cut of 0.25% rates were increased six times between October 2009 and May 2010.
In November 2010 we then saw the last rate increase of 0.25%, which at the time took the market by surprise, and since then rates have not seen any sign of pressure to increase, in fact just the opposite.
Currently the cash rate has been below 4% for 24 months and below 3% for thirteen months, as rates have remained low and as cuts continued, house prices only reacted to a great extent over the last 12 months. This I think does reinforce the perception that even in a period of tight supply and a long period of low rates, buyers remain vigilant, they need to see a period of sustained low rates and a combination of strong activity and demand before pushing prices up.
It is also interesting to note that only around a third of home loans are on a fixed term, but possibly this is not that surprising after all when you look at how stable rates tend to be and periods of change have been very limited over the past 25 years. The before and after impact of the GFC being a prime example and 1990 another, and while I am not an economist it appears that for the housing market above all stability appears to be the key, and change unsettles the market.