RBA Interest Rate Cut

Anchor: For the first time in 18 months, RBA has reduced the cash rate by 25 basis points. That’s a quarter of a percent for you and I. The move was design to lower the exchange rate and offset declines in key commodity prices.

However many are wondering how the 2015 Australian Property Market will react. Bryce Holdaway is a partner in Empower Wealth and joins us live from Melbourne. Bryce, thank you very much for your time. Firstly, can you give us an indication on how property is performing across the country?

Bryce: Yeah, Sydney and Melbourne did really well for the last 12 months. Sydney in particular doing about 13% and Melbourne doing 8.5% but that was a bit of a concern for the Reserve Bank because they did so well compared to some of the other states. For most property commentators, this week’s rate cut did came as a surprise but I guess, since the beginning of the year, RBA is the 13th central bank in the world to actually done that. If you we see it from a global perspective, it’s not so much of a surprise but in the microscopic view of property in Australia, it is a bit of a surprise.

Anchor: Bryce, we’ve heard from economist that we’re likely to see interest rate go down maybe another quarter in a month from now. The combined effect of half a percent, is that likely to further pump the housing market?

Bryce: Look, I think it is a concern. I’ve gone on record in the beginning of the year saying that Sydney and Melbourne will grow this year but not as much as the last 12 months. I think this will give it a little extra kick on the tail but one of the things that we are very concern about is the overheating of the market. So they’ve put some tools in place but I guess the biggest one, there is a bit of a glass ceiling in terms of borrowing at a lower rate.Whilst it’s good news for people with mortgages now, anyone who is looking to get into the mortgage market right now has a buffer in terms of long term averages. They are accessing the rates at a much higher rate than you can actually get the interest rate right now. I think that is a good thing and I think that’s about learning some of the lessons from the past with the American model of the GFC.

Anchor: With really low interest rates and economic volatility, is it a good time to be investing in property?

Bryce: I think it gives a lot of confidence to people. It’s a great Australian barbecue topic when it comes to Australian residential investment. So I think one of the thing that is going for in terms of residential investment, given that Melbourne and Sydney had done so well in the past 12 months, I think what they are actually suffering now is a bit of a yield issue. Some of the under-performing markets throughout the country, maybe Brisbane in particular and some of the regionals, they may get a little bit of a shot in the arm for this because investors are still being encouraged to get into the market and being enticed because they have a lot of confidence from these low interest rates. They might be looking for a bit of a yield play given the growth play is being done in Melbourne and Sydney. So I think that will have a positive impact on some of the other areas around the country that haven’t done as well as the two major capitals.

Anchor: Bryce, what is your view on the prevailing questions on the way the market is being distorted by the twin effects of foreign investment in new apartments and also negative gearing for property investors domestically.

Bryce: Look, I think that is a legitimate concern given the fact that last year, almost 60% of loan approvals were given to property investors which really is underpinning the market. It is a challenge but I guess the argument is always, if you take it away, who is going to provide that housing and it will become a huge burden to the government to do that. The incentives that they are giving through negative gearing are largely cheaper than the cost of providing it themselves. It is a bit of a challenge. You see some jaw boning from the RBA over the last six months. They have been talking about it quite strongly and there is a bit of a concern about the housing market bubble but I think the interest rate cut was largely around getting our currency down because oil price is down and that affected the commodities therefore flowing on to net export. So, as a GDP for the country, the growth is a bit of a concern. As I said before, in isolation, looking at the property market you would think that it is a bit of a surprise that interest rate have gone down but the fact that we are global player looking to shore up our domestic economy and ensure we stimulate growth, it actually isn’t a surprise and probably give a lot of fuel to the thought. Another rate cut is coming and again probably a surprise in the context of just property loan.

Anchor: So Bryce, for those people who are about to jump into their cars and head out for a day of house hunting, can you just summarise the things that they really need to keep in mind at the moment.

Bryce: The biggest thing is to pressure test your budget at a much higher interest rate because the sun, although it is looking good for a while, we are at 61 year low and there is even an outlook that it is going down further. But the banks are actually learning the lessons of the past. In any bubble situation, it’s usually signify by easy access to credit. That’s not the case. Access to credit is actually still having that buffer in place to see if you can afford it at a higher rate. So anyone who is looking to buy and anyone who is going out to an auction today, they should really be pressure testing their budget at a much higher interest rate than what they’ve got now to make that long term, they won’t be putting themselves under any pressure for any decision they make now whilst the interest rate are so low.

Anchor: Ok, Bryce Holdaway from Empower Wealth. Good to talk to you.

Bryce: Thank you.