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How the RBA’s low interest rates are affecting the property market

Over one year ago, the Reserve Bank of Australia decided to slash its official cash rate to a historic low of 0.1%. Amidst attempts to prop up Australia’s failing economy and the first recession we’d experienced in decades, they announced that the move from 0.25% to 0.1% would be in place for the next three years to stimulate jobs and wages.

Of course, low interest rates also had the natural effect of driving up housing prices. It’s not the first time where interest rates have been a significant contributor to property prices. For example, in 2011-2016, the RBA cut the cash rate from 4.5% to 1.5% and the national median dwelling price increased by 60% as a result. After further cash rate cuts in May and August 2016, price growth in Sydney and Melbourne accelerated even more.

The RBA’s historically low interest rates have had a profound impact on Australian housing. However, the Reserve Bank has explicitly stated they will not raise interest rates to ease soaring house prices. With that in mind, let’s see what the ongoing effects are on the Australian property market.

Borrowing is boosted

According to Dr Guy Debelle, Deputy Governor of the Reserve Bank of Australia, the lower interest rates have boosted borrowing and the cash flow of existing borrowers, which has put downward pressure on the Australian Dollar.

“[The cash rate] supports asset prices, including housing prices, which boosts household wealth and hence spending.”

Buyers ready to take on loans

In data released by the Australian Bureau of Statistics, prospective home buyers are becoming increasingly prepared to take on more debt to get onto the property market. Home loans in January 2021 are 44.3% higher than they were one year ago, and first-home buyer loans have similarly increased to 73% compared with the same period last year.

House prices soar

As people are inclined to borrow more, and with greater frequency, housing prices (especially in capital cities like Sydney and Melbourne) has surged. CoreLogic has reported that “Sydney’s median house price has reached $1,061,229, up 4.8% over the past three months, while in Melbourne it has climbed 4.2% to $829,509.” And, despite their generally lower markets, even properties in Canberra, Darwin and Hobart have been increases of more than 10% over the past year.

Furthermore, confidential analysis conducted by the RBA has suggested that house values could jump a further 30% over the next three years if borrowers because the cut in interest rates is permanent. Statements from the RBA have signalled that the lower interest rates (while not necessarily permanent) will not be lifted from 0.1% before 2024.

Although economists are predicting rate rises, the RBA continues to hold firm with Debelle stating,

“The Bank recognises that rising housing prices heighten concerns in parts of the community. Housing price rises can have distributional consequences. That is certainly an issue that needs to be considered, and there are a number of tools that can be used to address the issue. But I do not think that monetary policy is one of the tools. Monetary policy is focussed on supporting the economic recovery and achieving its goals in terms of employment and inflation.”

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