Reserve Bank sits tight on rates, but experts say property investment activity might force its hand

The Reserve Bank has kept rates on hold today, at a record low 2.5%. While debate rages over what might happen next, it appears many are predicting a rise in the last quarter of the year.

RP Data’s Tim Lawless noted that the housing market statistics are likely to be the factor causing the Reserve Bank some additional deliberation.

“Dwelling values were up 2.3% in March taking the cumulative increase in dwelling values to 15.8% over the current growth cycle which commenced in June 2012,” he said.

“While the headline growth rate is very high, it is really Australia’s two largest cities, Sydney and Melbourne, which are responsible for driving such high capital gains.  Dwelling values are up 22% and 17% across these two cities since June 2012.”

He noted that it’s not just these capital gains that will be a concern, but the amount of investment in the market, with investors comprising 38% of all new housing finance commitments. The last time investor numbers were this strong was before the housing boom in 2003.

“Clearly the rate of value appreciation across the Australian housing market has been unsustainably strong over the short-term, however the national economy is seeing a great deal of benefit from the increased level of both developer and buyer confidence which the RBA is likely to see as a positive outcome from the currently exuberant housing market conditions,” he said, pointing to a potential increase in the future if value growth continues along its current mark.

“If value growth continues along the current trajectory through I think the Reserve Bank will be forced to take action to quell the level of exuberance via higher interest rates,” he said.

This ties in with Property Observer‘s previously reporting an increasing number of economists pointing to a late-2014 increase.

Meanwhile, L Janusz Hooker, deputy chairman of LJ Hooker, said that leaving the cash rate at 2.5% should assist prices stabilising following a year of growth. Hooker also siad that the rate easing cycle is over.

“We have been seeing the benefits of those cuts every weekend at open inspections, people are still out house hunting or looking for investment properties,” said Hooker.

“Buyers know it is likely rates will be on the increase some time in the next year and are factoring it into their budget.”

Michelle Hutchison, money expert for Finder.com.au said that it’s cheaper than ever to switch home loans at present, making the RBA’s decision to keep rates on hold good news for consumers.

“More lenders are waiving application fees now than they were three years ago, and coupled with the banning of early exit fees on variable home loans in 2011, it’s now cheaper to refinance than what borrowers may think,” said Hutchison.

“The average cost to switch now out of variable loans that charge these fees is $719 compared to almost $900 in 2011,” she said, noting that borrowers shouldn’t wait for any further cuts from the Reserve Bank before seeking out a better deal.

The lack of change today was also predicted by HSBC’s Paul Bloxham last week.

This article first appeared on Property Observer.

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