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At its monthly board meeting, the Reserve Bank of Australia (RBA) decided that the official cash rate will remain on hold at 2.50 per cent for the month of October. This decision was widely predicted, with the RBA’s monetary policy appearing to be having a positive effect, as consumer and business confidence shows an improvement and the real estate market continuing to recover.

‘Overall, global financial conditions remain very accommodative’ RBA governor Glenn Stevens said. ‘Changes in the outlook for US monetary policy have increased volatility in the financial markets, but long-term interest rates remain very low and there is ample funding available for creditworthy borrowers’ he said. While the news is positive overall, according to Mr Stevens, the Australian economy has been growing a bit below trend over the past year in line with the economy adjusting to lower levels of mining investment and unemployment rates edging higher. This could be good news for property buyers as further cuts to the official cash rate at future RBA meetings cannot be ruled out as a result.

‘There has been an improvement in indicators of household and business sentiment recently’ Mr Stevens said ‘though it is too soon to judge how persistent this will be. Inflation has been consistent with the medium-term target. With growth in labour costs moderating, this is expected to remain the case over the next one to two years, even with the effects of the lower exchange rate.’

The Australian dollar rose recently, but is still 10 per cent below its level in April. Mr Stevens said ‘a lower level of the currency than seen at present would assist in rebalancing growth in the economy’ and this may also have an effect on the RBA’s decision to cut rates further in future.

‘The easing in monetary policy since late 2011 has supported interest-sensitive spending and asset values.’ He said. ‘The full effects of these decisions are still coming through and will be for a while yet. The pace of borrowing has remained relatively subdued to date, though recently there have been signs of increased demand for finance by households. There is also continuing evidence of a shift in saver’s behaviour in response to declining returns on low-risk assets.’

Based on Australian Bureau of Statistics housing finance commitments data, the number of mortgage commitments for new housing rose by more than 50 per cent over the 12 months to July this year and with the RBA encouraging record low interest rates, the outlook remains positive for property buyers and investors.

Sydney and Melbourne property markets appear to be driving a national recovery. Sydney housing auction clearance rates have been at or above 80 per cent for most of the year and Melbourne’s have hovered around 70 per cent and are rising. Sydney property prices have climbed 8.2 per cent in the past 12 months and those in Melbourne 5.3 per cent, with the average capital city home price rising 1.6 per cent to $500,000 in September alone.

Despite increased activity in the construction sector, housing stock levels remain low which together with historically low interest rates, is a major factor in increasing home prices. Research released during the week shows the total number of properties on the market is down 28.9 per cent in Sydney and by 13.8 per cent in Melbourne from the same time last year.

The rapid increase in home prices has given rise to speculation regarding a property price ‘bubble’. However, most analysts agree that this is unlikely given that housing supplies are also on the rise and this should help to keep housing price rises in check.

For more information about how the current low interest rates may affect your financial position and property investment decisions, contact us today.

Sincerely,
Dimuth Samarasinghe (Sam)