Finance

RBA keeps interest rates on hold for June

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The Reserve Bank of Australia (RBA) has again chosen to keep the overnight cash rate at its record low level of 2.5%. The cash rate has not moved since August 2013.

The decision was widely anticipated by property industry commentators, with 16 surveyed industry experts recently predicting the cash rate would stay on hold.

RP Data’s research director Tim Lawless says that recent results in the property market provide a backdrop for the RBA’s decision.

“From a housing market perspective, the Reserve Bank should be less concerned about housing markets overheating, with RP Data yesterday reporting the first fall in dwelling values in a year over the month of May and the trend rate of growth across the housing market has been cooling,” he says.

“Australia’s housing market has seen two years of escalating property values, so from a cyclical perspective the housing market is due for a slowdown.  Cooler housing market conditions shouldn’t surprise the Reserve Bank, who have been warning about overheated conditions and speculative investment activity in the Melbourne and Sydney markets.”

According to Lawless, the current housing market will encourage the RBA to keep rates low for now.

“Gross rental yields in both these cities have fallen to near historic lows as value growth has substantially outpaced rental growth.  With the heat potentially coming out of the housing market, the RBA will find it much easier to keep interest rates at their low setting in an effort to continue stimulating housing construction and consumer spending.

“Add to the recently weak housing market a stubbornly high Australian dollar, lower commodity prices, slowing dwelling approvals and weaker consumer sentiment post budget and it’s clear that the RBA is likely to hold off on rate hikes for the foreseeable future,” said Lawless.

Property Observers Jonathan Chancellor agrees, writing yesterday that the Reserve Bank will be content with a slight dip in home values over May. 

LJ Hooker deputy chair L Janusz Hooker said today’s decision is unsurprising given the stability of the economy.

“Looking forward, the only hiccup appears to be the uncertainty surrounding which federal budget measures will pass parliament,” said Hooker.

“Initially this caused a drop in consumer confidence but that appears to have passed.

“The good news for home owners is the longer this uncertainty remains in place the longer interest rates will remain on hold.”

Hooker predicts that the economy’s movement away from the mining sector will lead to future rate increases, but probably not until the end of this year or the beginning of 2015.

Michelle Hutchison of finder.com.au says that while interest rates are low, buyers shouldn’t wait for property prices to drop before investing.

“While there was no change to the cash rate today, interest rates are set to rise so it’s a good time to consider locking in a fixed interest rate,” says Hutchison.

“For first home buyers, don’t wait for property prices to fall as rising interest rates could outweigh the benefit of a cheaper property,” she says.

Low interest rates and slowing property price appreciation have made housing more affordable at a national level than it has been for more than a decade, according to the March 2014 quarter HIA-CBA Housing Affordability Index, released last week.

For more on how to take advantage of low rates and prepare for a rise, click here.

This article first appeared on Property Observer.

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