Low cash rate's impact on property

Low cash rate's impact on property

You've probably heard plenty of discussion over the official cash rate over the past year or so. The Reserve Bank of Australia (RBA) voted to reduce it to an all-time low of 2.5 percent in August 2013 and cut it again to 2.25 percent in March.

There's been a lot of analysis of the decision and this has only continued as the RBA board has opted to maintain the cash rate at this level in April.

Aside from opening up a wider range of cheap home loans, the all-time low rate has also created situations in the rest of the property market, some of which have been welcomed and others not so much.

Impacting house prices

One of the biggest areas of concern in the Australian market at the moment is the threat of rising property prices. There have been claims that these increases might be unsustainable, making it difficult for people to buy real estate for the first time and make investments in the sector.

Capital city markets are notoriously difficult to get into, although there are often more affordable suburbs that could offer investment opportunities.

The Real Estate Institute of New South Wales (REINSW) has called on the RBA not to use interest rates to bring down property prices and act as an antidote to an "over-inflated market".

"The fact is that investors are more confident about putting their money in Australian property compared to the uncertainty of the share market and the underlying mistrust of this sector following on from the GFC," said REINSW President Malcolm Gunning.

He argued that interest rated aren't the "quick fix" solution that the RBA is hoping for and that other strategies should be rolled out to make investment properties more affordable to the masses.

Property investment could thrive

The RBA itself acknowledged at its address to the Commonwealth Bank of Australia's 7th Annual Australasian Fixed Income Conference that residential property investors are already responding to the low cash rate, and want to make their move on the market.

Deputy Governor of the RBA Philip Lowe revealed how self-managed super fund investment in property is becoming increasingly common, which is largely as a result of the low interest rate environment.

However, this has led to an increase in prices, which will no doubt leave the RBA wondering what other steps it can take to ensure the needs of everyone are met. Data from the group shows prices have risen by around 10 per cent across the country over the past year, although this has reached as high as 13 per cent in Sydney.

It's not only property prices that have felt the impact of the cash rate, but there's also been a rise in home loan approvals for residential property, as well as auction clearance rates.

Minutes from the RBA's October meeting pointed to an 8 per cent rise in dwelling investment in the 12 months to the June quarter 2014. Not only this, it's expected to increase even further as more people secure the finance they need to be able to purchase an investment property.

In fact, investor credit is up by almost 10 per cent, while overall growth in housing credit stands at around 7 per cent in annualised terms.

The future of the cash rate

There's no guarantee the cash rate will remain at 2.25 per cent for much longer. Economists predict another rate cut in May 2015.

If you're thinking of investing then securing the right mortgage rate is essential to get your venture on on the best possible footing.

Image credit: efffective.com

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