Rate cut to stimulate investors, worsen low stock levels: real estate agents

by | Aug 4, 2016 | property

This article was first published via afr.com.au by Michael Bleby | Su-Lin Tan on Aug 2 2016.

Image: Tuesday’s rate cut- Likely to drive activity and worsen the problem of low stock levels. Michelle Smith


Lower interest rates will stimulate activity in Australia’s residential housing market, with cheaper money prompting more people to chase the already-limited stock of property on the market, agents say.


Property listings are well down on their levels of a year ago and the central bank’s decision on Tuesday to cut interest rates to a new record low 1.5 per cent will spur the number of buyers chasing available properties, real estate agent Andrew Hayne of Marshall White said.


Cheap money was already prompting buyers – whether upsizers or downsizers – to buy homes before putting their existing property on the market and a further cut would encourage that behaviour, said Mr Hayne, who deals in premium properties in Melbourne’s eastern suburbs. 


“Because of low interest rates, they’re prepared to take a bit of a punt on selling their own, post-purchase and that will mean more buying if rates are lower and the cost of borrowing is lower and will they risk even less,” he said. 


“It’ll deprive the market of stock because people will hold off selling until they’ve bought. That’s the catch.”

Steady gains loom

Still, with relatively low levels of stock on the market, price gains are likely to be limited, in contrast to the heady growth of past years. More cautious lending by banks and regulator-driven tighter loan standards has led to a slowing in housing loans this year, the Reserve Bank of Australia said in the statement accompanying its decision to lower the benchmark cash rate. House price growth has slowed and “considerable supply” of new apartments were coming on stream in the next couple of years, it also said. Data provider CoreLogic this week said prices nationally rose just 0.8 per cent in July – the weakest rate of growth since September 2013. 


“All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished,” the RBA said.


Some disagree. Louis Christopher, the managing director of SQM Research, said any boost to the market would depend on whether banks passed on the full 25-basis point cut to consumers. Commonwealth Bank of Australia, the first to respond, said it would only pass on a 13-basis-point reduction.


“Thirteen basis points won’t do much but if 25 basis points are fully passed on, it would accelerate the market in Melbourne and Sydney and then APRA would have to step in,” Mr Christopher said. 


On Sydney’s north shore, Savills Cordeau Marshall agent Kathryn Marshall said the RBA cut wouldn’t make much difference. 


“What it’s doing is not allowing house prices to drop. If anything, it allows them to stay where they are and in some cases they will go up.”


Investor interest

LJ Hooker’s national research manager for Sydney Matthew Tiller said the cut would boost investor interest. 


“Demand in Sydney will definitely increase for most housing as interest in other asset classes decrease,” Mr Tiller said.


In Melbourne, Scott McElroy, a director of agency Hocking Stuart said lower rates were likely to crimp stock levels in more affordable segments of the market, as they would prompt investors to hold, rather than sell, property. 


“It’s going to keep property as a great place for people to park their money,” Mr McElroy said. “When interest rates are so low, there’s no incentive to sell. Rental returns are keeping pace.”


Further, while a lower cash rate and lower rates from the commercial banks, could benefit existing borrowers and allow them to renegotiate better rates, it would do little to encourage first-time buyers into the housing market as they were assessed by their capacity to repay loans at much higher rates, he said. 


“No-one really talks about that,” he said. “It’s great for existing mortgage holders, but doesn’t make that much of a difference for someone trying to get into the market.”