It appears that very low interest rates are here to stay, well at least for the immediate and foreseeable future.
The Australian housing market has always been captive to interest rate movements, they influence almost every aspect of the market and not only buyer demand.
However, it’s a very long time since we have had to live with rates as low as they area today, and they may even drift lower. It’s almost half a lifetime, 30-years since interest rates were an astonishing 17-17.% (June 1990) and the last time rates were double digits, 10.50% was in July 1991.
Since then with some exceptions, rates generally hovered around 5/6% although they did reach 7.5% in July 1996 and 7.25% in March 2008 only to head in a downward direction from their starting point of 5.25% in November 2008 to reach just 1% on July 3, 2019.
Between August 2016 and May 2019 the RBA cash rate remained stuck at 1.5%. But now that we’ve entered an era of super low rates, we have to consider a new range of impacts on the housing market and the wider economy.
This year when the RBA broke out from its previous 1.5% level, with two cuts each of 0.25%, potential buyers and those with an existing loan appeared to have taken particular and quick notice.
While the evidence is somewhat anecdotal, there was much more interest in the RBA rate cuts among buyers and increased demand for more competitive home-loan rates. Those with a mortgage were advised that they should have a ‘3’ in front of their interest rate and if not, to ask for a better deal.
In short, we’ve seen the market become far more alter to the role and level of interest rates however, this is yet to translate into any rush of buyers into the market as lower rates deliver a mixed-message for the wider economy and for market confidence.
Established Borrowers Benefit
However, it’s easy to see, that anyone with debit at a personal, corporate or government level should be winners. In the housing market anyone with a current mortgage should be seeing the benefit of lower mortgage rates, and if they are not then they should be looking for a new lender.
There’s also another side to this discussion, as lower rates for established owners might delay any move to sell, because it’s now cheaper to service an existing loan, there may be less motivation to sell.
While, it’s also true that cheaper home-loan rates can make it attractive to borrow more and trade-up, but that requires a level of confidence which is still in short supply.
Lower interest rates also make it much more attractive and cheaper for governments to take on debit which, they can use to create economic stimulus.
Often that debit is used to fund infrastructure which, not only acts as an economic boost, it can also help the housing market to create more supply by unlocking new markets or increasing the capacity of already established areas to accommodate more homes.
New Loans and Retirees
It’s understandable that anyone with existing debit would give lower rates a very big tick however, there are at least three other groups where the impacts are less certain.
They include those seeking new loans and those who are reliant upon fixed-interest incomes, either in retirement or those building retirement savings.
New home loans will look more affordable however, lending rules are now much tighter, a situation that’s made even tougher when rates are low as this trend can indicate a less robust economy. Thus lenders are more critical of loan applications.
Interest rates never act in isolation, they touch every aspect of the entire economy and this can create winners and losers however, what the housing market now has to adjust too is a long-period of low rates.
I’m putting these thoughts forward from my own personal experience as I’m not an economist.
Long-Term Low Rates
Low interest rates will usually mean slower levels of economic activity and slow growth will impact demand in the housing market. However, housing is always seen as a store of capital with potential for capital growth a fact that lower rates only reinforce.
From a wider policy view-point, teeny low interest rates limit monetary policy and bring fiscal policy to the forefront of government’s ability to stimulate the economy, this can as we have just seen, include tax-cuts.
Government debit is also much more sustainable in a low interest rate environment, and there’s an ever-louder argument that creates much more room for all levels of infrastructure spending.
However, if this does not happen it can have a negative impact by slowing future housing supply and that will eventually see price rises. Another flow-on impact is that low-rates can make it harder for potential buyers our third group, to save a deposit for a new home, and that’s even tougher if supply levels fall.
Low rates do impact investment options and they can do so very quickly. This usually sees much more demand for stable fixed assets at both the corporate and at the household level and as demand increases so will house prices. For those on a fixed interest income if there’s an option they may be attracted to invest in residential or commercial property with greater returns and only marginally higher risk.
However, more affordable debit has complex ramifications for the housing market. There are benefits for established homeowners and lower rates should make it easier to create more stock but, if does not happen and supply falls then prices will increase. This creates the pressure for better planning and infrastructure delivery.
The complexities of a long-term low interest rate environment are set to greatly influence the entire economy and they will extend well beyond the headline mortgage rates we see all around us.
Over the last 30 years, RBA cash rates have averaged about 5/6.0% however, current low rates might have been expected to see a rush into the housing market, while people’s attention appears to have been caught a rush of sales has not happened.
Perhaps that’s because until 12 months ago we had rising home prices, from which we are still adjusting.
The sales of existing homes have slowed and only recently have investors shown fresh but tentative activity. Sales of new-built home and apartments remain below their 2017 peaks and there are early signs of reduced supply into 2020-2021.
The mixed response to historically lower mortgage rates highlights a broader challenge facing the wider Australian economy however, there are options and property should remain an attractive asset as we enter a new era of ultra-low interest rates.