The good, the bad and the interest only

RBA plot twist

The RBA regularly disappoints audiences who prefer their fiscal performances feisty! Same costumes, dreary music, monotone actors. But this month's curtain revealed another rate cut of 0.25%—the second variation in as many months…


Australia’s wage growth is anaemic and inflation, weak. Wobbly economics threaten rising unemployment and less consumption. Consumer spending supports about 60% of our economy! Then there’s Trump’s tweets, Mexican wall mutterings and a teetering tit-for-tat US/Chinese tariff war. If China slows, we’ll have woes! They’re our biggest customer! 


Bank interest rates should drop to around 3.5 - 4% now! Good luck to your new season, RBA!


Housing market: The good, the bad and the interest-only


The good

House prices are still dropping, but less quickly. And that’s good news - for sellers at least! Auction clearances are also being kinder to vendors.


APRA is MC'ing the festivities! Their pending decision to loosen lending will allow banks to set minimum rates and add a 2.5% rate rise ‘buffer’, which might make it easier to secure a loan. 


The bad

Ouch! Australian house prices have fallen 7.7%* since their November 2017 peak. Sydney has hurtled a gut-wrenching 15% downward -  its greatest fall in 20 years - while, at 11%, Melbourne had its worst drop ever!


RBA’s cut should help the market bottom out, but don’t expect the invisible hand to swoop in and restore record-breaking house prices. Another boom is unlikely. Blame crazy household debt, the likelihood of worsening unemployment and cautious lenders — even after APRA’s changes. 


Also, the love affair with Australian property has waned for foreign buyers, banks are antsy about investment lending and there are east coast apartments aplenty coming online. Plus, when a million or so loans* switch from interest, to ‘principal and interest’ over the next two years, mortgage service costs will balloon.


So many forces pushing the consumer economy back, before it even considers tiptoeing forward...


The interest-only

APRA’s latest quarterly data* says the interest-only loans that drove the property boom have come to a standstill. It’s great news from a risk management perspective because those loans sparked the GFC. 


The rates outlook


RBA’s Governor Lowe announced*, “recent data suggests we are not making any inroads into the economy’s spare capacity … it is not unrealistic to expect a further reduction in the cash rate.”


Come again? In plain English? "Get ready for more drops!” 


Westpac’s Chief Economist and Head of Research, Bill Evans, already forecast two rates cuts and is now confident of a third. If he’s right, we’ll see a record low 0.75% by November. 


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