THE latest round of interest rate is expected to provide the residential property sector with a boost, setting the scene for a recovery in late 2012/2013.
The Australian Property Institute Victorian president Steve Simpson believes the second successive rate rate, 0.25% to 4.25%, will stimulate both the residential property market and retail sector.
In terms of retail sales, Simpson said retailers will be jubilant at the news, leading up the Christmas season. He pointed to the results by department store giant David Jones that its sales fell 11.2% in the first quarter, as an example of the hardship endured over the past year.
Simpson also said the pressure will ease on landlords to reduce rents because tenants were feeling the pinch.
“The rate cut may not lead to increase in rents, but it will stop rents from dropping further as we have seen in markets like Bridge Rd where landlords have been under pressure,” Simpson said.
API QLD state president Philip Willington said the two rate cuts will importantly change consumer sentiment.
“Homebuyers have been cautious and nervous. The overall residential property market in QLD has been falling for 18 months, so these rate cuts will put a floor to it and stabilise the market.
“However we are still a long way from seeing a recovery in the housing market. Until affordability improves, QLD’s housing market will remain subdued. I think the market will begin to recover in 2013/14,” Willington said.
AMP Capital Investors chief economist Shane Oliver said the rate reduction is good news for the market.
However he said the immediate effects of the rate cut will not be noticed until mid next year because the market reaction tends to lag.
Having said that, Oliver is predicting rates will be reduced again in February next year to 4.00% and 3.75% in the middle of 2012, which he said will set the scene for a recovery in the market.
“The housing market has suffered due to very nervous home buyers. The first rate cut was a positive move but it was not enough to entice buyers back into the market, they remained cautious,” he said.
BIS Shrapnel senior project manager Angie Zigomanis said the rate cut will have little impact on things between now and Christmas, even though all eyes will be on short term indicators such as residential auction clearance rates.
“However, it will provide confidence that interest rates won’t be increasing in the short term, which should in turn encourage residential purchasers to increasingly wade into the market through 2012.
“Having said that, the RBA would not be reducing rates unless it has some concerns about the direction of the economy. Our view is still for the economy to strengthen in the medium term on the back of rising business investment, and we think that is also the RBA’s view.
“On this basis, the cut in interest rates reflects the softness in some sectors of the economy and the impact of the uncertainty of overseas markets and the caution that it has created. With inflationary pressures now having somewhat eased, it affords the RBA a chance to help stimulate confidence and other sectors of the economy in the interim,” Zigomanis said.
According to financial comparison site RateCity’s CEO Damian Smith the latest round of cuts will potentially put an extra $50 into the pockets of an average $300,000 mortgage.
“Many borrowers may not realise that they could shave more than 1.22% (122 basis points) off their mortgage by switching from the benchmark standard variable to one of the cheapest variable rate loans on the market – far more than the effect of any 0.25% (25 basis point) reduction from the Reserve Bank.
“By switching to a low-rate loan, borrowers with a $300,000 mortgage could save $233 per month in repayments. And if they ploughed all that saving into repayments, they could save themselves about $77,700 of interest over 25 years and be debt-free more than 5 years sooner,” he said.
Property research firm Aviate Group’s managing director Neil Smoli said investors still need to exercise caution.
“More than ever property investors need to ensure they take every precaution to mitigate risk and approach investment opportunities with security front of mind.
“It would be a mistake to view the downward shift in interest rates as the sole catalyst to pursue a property investment,” he added.
Although he added that the current economic environment lends itself to a property purchase, with influences like prices, income levels and rental yields all favouring investors at present.
PropertyReview
