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What impact does the RBA have on markets?

What impact does the RBA have on markets?

By Mathew Tiller on Jan 18 2018


The official cash rate remained on hold throughout 2017.   In this column, LJ Hooker’s Mathew Tiller provides an overview of the intent of RBA decisions.  

Cutting rates

The objective of any rate cut by the RBA is to stimulate the economy by encouraging companies and businesses to borrow to invest in their growth. Growth in private investment would in-turn see demand for labour increase and boost employment and wages. This would be a positive move for mortgage holders as it reduces interest repayment costs. However, on the flip side, it also reduces income for savers that rely on investments such as term deposits.

Impact on property markets?

The initial impact of a rate reduction would be to boost mortgage affordability and in-turn lift demand for all property types. This move would have a positive effect on major property markets around the country.

Keeping rates firm

The stability and attractiveness of record low interest rates has had a positive impact on property markets by boosting demand. It has also benefited the economy by driving building approvals and construction activity higher. These developments have created jobs and helped shift the economy away from its reliance on the mining and resource sector.

Effect on property markets?
Keeping the cash rate stable would see demand for real estate remain elevated, as buyers continue to take advantage of the cheap mortgages on offer. Price growth will vary across markets, depending on where in the current cycle they sit and the strength of their relative local economies. For example, Sydney is expected to see softer growth compared to previous years, which has driven affordability and yields lower. On the other hand, Brisbane has seen lower price growth over the current cycle which will now be attractive to buyers thanks to comparatively higher levels of affordability and yields.

Increasing rates

One of the key reasons for the RBA to lift rates would be to contain property price growth. Throughout the past year strong property price growth has been of concern to the RBA. An increase in interest rates, however, would have seen the dollar increase in value and in-turn hurt export reliant industries.

Effect on property markets?

An increase in interest rates would slowly reduce buyer demand; particularly from investors as higher interest rates make other investment assets more attractive. It would also gradually see an increase in listing activity as property owners sell up to lock in the capital gains achieved during the current growth cycle. The combination of both of these factors would see price growth cool markedly.

 

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