In a bold move this month the Reserve Bank of Australia (RBA) slashed interest rates by 50 basis points – to 3.75 per cent. This is the biggest cut since near the start of the GFC in February 2009, and has taken some economists and property commentators by surprise.
With the cash rate stalled at 4.25 per cent over the last three RBA meetings in February, March and April, economists were predicting a cut in May. The 50-point cut was double the usual 25-point cut. Hopeful these cuts would be passed on in full, property investors were greeted with a more restrained response from Australia’s big four banks. The major banks have passed on between 32 and 40 points of the 50 point cut bringing standard variable home loan rates to around 7 per cent.
Property investors have welcomed these cuts with the rates cuts will on average still benefit investors by between $50 and $100 per month (up to $900 a year in interest repayments on an average $300,000 mortgage, according to Westpac).
The latest rates drop in May comes amid what RBA Governor Glenn Stevens called a ‘subdued’ property market after last year’s fall: “Housing prices have shown some signs of stabilising recently, after having declined for most of 2011, but generally the housing market remains subdued,” he said in a statement after the 1 May Board meeting.
The RBA’s concern that the Australian economy needs an extra boost reflects what is seen overall as a slowdown, but not a plummet in the world economy. Says Stevens: “A deep downturn is not occurring at this stage, however, and in fact some forecasters have recently revised upwards their global growth outlook.”
This current cut in interest rates will provide a boost to the property market. Investors and home owners will be eagerly waiting to see if this translates to an upturn in activity flowing through to increasing prices.