CoreLogic research analyst Cameron Kusher has said there is a widespread belief that the RBA is set to cut official interest rates in June, and while this is the most likely outcome when the board meets next week, it might not happen. Here’s why.
Mr Kusher says that he, the interest rate futures market and the overwhelming majority of economic commentators are anticipating a cut, and he can also see the RBA holding the rate exactly where it is — because there have been a number of changes recently that have positively impacted the property outlook.
1. No change of government
Mr Kusher said Labor’s proposed changes injected uncertainty into the market.
“While the Labor Party was expected by most to win the election, the aftermath of a Coalition win seems to have seen a level of confidence returning to the market.
“Dwelling value declines were already slowing, but now lenders are reporting much higher levels of mortgage demand and auction clearance rates last week lifted to their highest level nationally since mid-May last year, and in Sydney they increased to their highest level since April last year.”
2. APRA’s serviceability move
This means that more people will be borrowing, and borrowing more, Mr Kusher said.
“Again, these changes aren’t yet live, but once implemented, easier access to a housing loan should support a lift in market activity and help to provide a floor under housing prices.”
3. RBA flagging a cut
“Interest rate cuts put more cash in mortgage holders’ pockets,” Mr Kusher said.
“If someone is struggling to repay their mortgage, they can contact their banks and ask for a reduction in repayments, and for those that choose not to reduce their repayments, they end up paying back more of the loan principal, thereby paying down debt quicker.
“Furthermore, a lower cash rate typically means lower interest rates on savings accounts, thereby reducing the incentive to save and increasing the incentive to spend.”
Mr Kusher said all three of these are “overall a positive” for the housing market.
“It is important to note that items two and three have not yet happened, so anyone now buying could have bought pre-election but chose not to,” he said.
“To me that indicates a concern around policy changes proposed by the party perceived as most likely to win the election.”
Mr Kusher said that if the RBA does cut next week, it will be a cut related to economic growth and inflation, rather than housing.
“Headline inflation was unchanged over the March quarter and just 1.3 per cent higher over the year. The RBA’s preferred measure of underlying inflation was 0.2 [of a percentage point] over the quarter and 1.4 per cent higher over the year, both drifting further away from the 2 per cent to 3 per cent target range.
“Underlying inflation has been allowed to sit below the target range since December 2015 and hasn’t hit the 2.5 per cent midpoint since September 2014.”
Also, the research analyst said that GDP, or economic, growth was recorded at 0.2 of a percentage point over the December 2018 quarter — its lowest growth rate since September 2016.
He said that, on an annual basis, GDP rose by 2.3 per cent, which is its slowest rate of growth since June 2017.
“So we have low inflation and sluggish economic growth, which has been the case for some time, but both have weakened further in their recent releases.
“The RBA has repeatedly stated the main reason for not cutting interest rates is the strength of the labour market. However, it has now also weakened. On a seasonally adjusted basis, the unemployment rate in April 2019 was 5.2 per cent, having risen for two consecutive months, and the highest unemployment rate since August 2018.
“Although the unemployment rate has risen, annual jobs growth has increased to 2.6 per cent, its fastest growth rate since June 2018, and the workforce participation rate at 65.8 per cent, the highest it’s been since January 2018.”
So, Mr Kusher pointed out that, while the unemployment rate has weakened, more people are in work or looking for work and job creation has accelerated.
“Given all of this, I still believe than an interest rate cut on June 4 is the most likely scenario, but I won’t be surprised if the RBA, which has taken a slow and measured approach to cash rate setting of late, is tempted to wait another month,” he said.