Australians may be already suffering from election fatigue, but house prices is a topic that never gets old.
There will be many homeowners desperately hoping that a widely-predicted cut in the Reserve Bank’s cash interest rate in May will breathe some life into the property market.
The bad news is that even a 50 basis point (half a percentage point) cut, which most economists are expecting by later this year, is unlikely to make much of a difference to the demand for housing. And demand is one of the main determinants of price.
That is because unlike in previous property cycles, the fall in house prices which began some 18 months ago was not a response to higher interest rates. Nor was a slowing down in economic growth a trigger for the slump.
It wasn't interest rates that triggered the slump in housing demand. So why should they end it?CREDIT: ROB HOMER
It was macro-prudential measures introduced by regulators that curbed demand from different groups of property buyers, including overseas buyers, property investors and interest-only borrowers.
These macro-prudential measures were deliberately designed to take some air out of the property bubble. Tighter controls on bank lending and tougher checks of the creditworthiness of borrowers have dampened demand.
The one positive element for the property market over recent years has been the historically low interest rates.
So it’s questionable whether a fall of even 50 basis points off the current discounted variable rate of 4.68 per cent to 4.18 per cent is going to make buyers chase properties again.
And then there is the highly contentious issue of whether the major banks will pass on the full RBA rate cuts to their customers.
If recent history is any guide, banks have tended to pocket a few basis points for themselves in order to improve their lending margins and their profits.
They have previously argued (quite rightly) that the RBA’s cash rate is only one element that goes into the mix to determine how much banks pay for money. Banks also borrow from wholesale markets overseas in their funding mix.
The way this rolls is a pretty familiar story. The banks don’t pass on the full cuts, the government makes a few scathing remarks about banks being profiteering corporates and failing in their responsibilities as corporate citizens.
And meanwhile the banks desperately hope that something big happens (Trump does something particularly extreme, a political coup in Canberra,. an airline strike etc) and the news cycle rolls on.
Of course banks have become far more sensitive to criticism of their profit motive since the royal commission into the finance sector exposed their behaviour towards customers.
But uncomfortable as it might be, banks will put on their flack jackets and expose themselves to a government berating and a community backlash rather than take a full frontal hit to their profits.
In September 2018, three of the big four banks took the plunge and raised variable rates after their wholesale funding costs increased. It was a bad time, PR wise, and they knew it would be unpopular. So if it is in their interests to hold back on passing on the full RBA rate cuts, they will.
Their decision will be informed - as always - by their cost of wholesale funds which incidentally has been falling of late. So banks have a bit more latitude around their cost of funding.
But just as importantly, the lull in demand for home loans has resulted in a particularly competitive market for banks desperately looking for high quality borrowers with a decent deposit and good credit record.
(There has been a slew of discounting on fixed rates over the past month.)
This could possibly be enough, under normal circumstances, to encourage the big banks to hand on the full RBA rate cuts on variable loans.
Strain on bank profits
But the limp growth in loan volumes and a decline in markets income has put significant strain on bank profits in the first half of their financial year - the reality of which will be seen in the coming weeks as ANZ, National Australia Bank and Westpac deliver their results.
While rate cuts won't be enough to reignite the property market, they could still provide it with a tipping point.
Already there are tentative signs that the steepness of the decline in home prices is flattening, according to CoreLogic’s Tim Lawless, who says the worst of the falls hit in December. CoreLogic assumes that the market will bottom out by this time next year.
Lawless says the driving factor in house demand at this point is not interest rates, but credit availability.
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