(Realestate) – It has never been cheaper to borrow money to buy a home in Australia and property seekers love a rate cut. But do such cuts boost other sectors of our struggling economy?
Paying off a mortgage has never been cheaper, but what do lower interest rates mean for other sectors of the struggling Australian economy?
Home loan rates are now the lowest ever recorded in Australia’s history and it’s likely that they will continue to fall, even after today’s decision to cut rates to 0.75%.
In the week following an RBA rate cut we often see a boost in activity on realestate.com.au. History has shown that increased activity from people borrowing more money, eventually results in house price rises. It is clear that rate cuts boost house prices.
By cutting the cash rate and making lending cheaper, the RBA is attempting to boost the economy through spending.
The challenge with this method is that the RBA cannot control who will want to borrow and spend. Rate cuts certainly boost house prices, but the broader impact on the economy will depend a lot on what happens next.Interest Rates
How does a confident housing market help to stimulate the economy?
Real estate employment does well from a rate cut as agents are active with more buyers and sellers. There’s also a range of property related industries such as architecture and building trades that rise on the back of greater confidence in property. Renovation activity also climbs as people are more assured and happier to invest in the improvement of their homes.
Increased activity, greater consumer confidence and rising house prices eventually positively impacts the wider construction sector. However, the time it takes from hitting the bottom of the market to construction activity getting started again, varies between markets.
It is likely that this cycle we are currently in will take longer to get moving than what we’ve experienced historically. This is primarily because a lot of the drivers of the previous construction booms have fundamentally changed; local investor activity remains very low, offshore investors are far less active, and we are starting to see quality issues emerging in many developments.Will house prices rise by 10%?
While price rises aren’t good for housing affordability, there does seem to be a link between consumer confidence and price rises. If house prices decline, consumers seem to lose confidence. This could be due to how much they have paid for their homes, or because for most people, it is the largest asset they may ever own.
Confident consumers spend more money, so indirectly, it is possible that the rate cuts will boost retail trade through house price rises. More directly, interest rate cuts mean people are paying less on their mortgages, which puts more money in their pockets. Although, whether they decide to spend this money, save it or pay down debt is uncertain and beyond the control of the RBA.
What might derail these efforts?
There are a number of concerning economic indicators at the moment. Inflation and wages growth are low, unemployment is creeping up, economic growth is positive, but not moving quickly.
Similarly, retail trade is low and a reduction in building activity is a problem. Jobs are still being created, but employment in retail trade, construction and real estate have been dropping.
Ideally, businesses would be borrowing money to employ more people, then consumers would have more money in their pockets to continue spending.When is the best time to sell or buy? Property cycles explained
While interest rates boost house prices, it isn’t the only part of the market that needs stimulating.
Although there are many instances in which interest rates boost activity, fundamentally a rate cut is just one tool to get the economy back on track.
Tax cuts and increased spending on infrastructure are a couple of the other vital factors that need to be considered for economic growth.