The Reserve Bank of Australia has held the official cash rate constant at 2.5 per cent with a justification that the national economy is growing well.
Factually, the economy is growing at a mild rate of 1.7 per cent and a snapshot of the residential market reveals a trickle-down effect 10.9 per cent increase in dwelling construction to the end of March 2014. The immediate effect could be little or no improvement in the residential market, but is the cash rate the only reason?
This is not the first time the RBA has held the cash rate steady - as a matter of fact, this is the ninth time there has been no change since it first hit 2.5 per cent back in August 2013.
Holding the cash rate at a steady level is supposed to make the economic conditions more favourable for investment decisions (which include homebuying) and for wider society to loosen their purse strings. Have the RBA succeeded? Several indicators can be the judge of this.
Housing affordability is one, and between August 2013 to March 2014 there has been a definite improvement – though not as high as expected – of 1.2 per cent.
The consumer sentiment index did improve. However, fluctuations followed. Dwelling approvals (which informs you of the demand in the market) tells the same story. Would it be safe to assume that a steady cash rate should have been reflected in positive and steady increase in these three indexes? And if so, what can we conclude from the result? Did the RBA succeed in their objective?
The answer to the question lay with the fact that it’s not all about the RBA. For instance, what if unemployment increases, or tax rates rise to a level where disposable income is eroded for Australian families?
Predicting the residential market: food for thought
It is common practice, even among real estate analysts, to predict the market by a mere look at just one event. For example, some credit population growth as the primary factor for increased demand. This is not always the case and throwing all your eggs into one basket can lead to poor decision making. Data from the Australian Bureau of Statistics indicate there is no consistent relationship between population growth rate and housing affordability.
Furthermore, people tend to expect a policy measure to bear results in the fastest possible time. Unfortunately, there is a lag between when a problem is identified, a policy is implemented and results are achieved.
Moving forward, the cash rate alone won’t alter the residential market response to the latest decision by the RBA. The reaction will depend on the performance of the population, the environment, the economy, environmental history of the land/property, and the preference of individuals/investors. So how can we best predict the residential market? A more thorough approach would be to take a bird’s eye view, but which indicators hold the most weight?
Do your own research, get informed about the big picture and you’ll feel more comfortable making your property decisions.
ABOUT THE AUTHOR
Augustine Conteh is a research analyst for the residential property market at PRDnationwide.
Augustine holds a Master of Science degree in Economics and Management Science from Humboldt University in Berlin-Germany, with specialisation in economic and market policy analysis, innovations management and operations research.
Augustine has served as a research fellow at the Queensland University of Technology, and a sessional instructor at the University of Sunshine Coast and Griffith University.