RBA belatedly decides to "wait and see"

By Terry Ryder, 1st June 2010

For the first time since February the Reserve Bank of Australia has met without increasing the mortgage payments of Australian families. Following its monthly meeting today, the RBA announced that the Official Cash Rate will remain unchanged at 4.50%.

While today’s decision is a reprieve for borrowers, recent data indicating the property market is softening demonstrates the RBA went too hard too fast with five increases in six months, according to Laing+Simmons general manager Leanne Pilkington. 

“Those rises have had a damaging effect on the housing market, creating unnecessary hurdles for buyers and discouraging investors, without considering the real reason for recent price growth,” Pilkington says.

“The RBA failed to realise when raising rates at six of its last nine meetings that the price growth being experienced was driven by the imbalance between supply and demand, and nothing has yet been done to address this.”

Pilkington says forecasts that the cash rate will continue to rise, potentially reaching 5% by year’s end, are “extremely concerning for the market”.

Mortgage Choice says today’s decision indicates the RBA feels a wait-and-see approach is more appropriate now the cash rate has reached a more neutral setting. However, it does not guarantee the stability of mortgage and other interest rates.

Mortgage Choice senior corporate affairs manager Kristy Sheppard says there is much talk around a break of at least two months from rate rises, but economists seem divided as to whether they will rise again in 2010.

“No one has a grasp on when the cash rate will move again,” she says “Some are saying it could be as early as next month while others envision a steady rate until the end of the year.

“Really, that is of little consequence because these days the cash rate has less of an influence on mortgage rates. The focus should be whether lending institutions move rates outside the RBA cycle, which they have indicated is a possibility due to the continued volatility in their cost of the funds.

“Borrowers of all types are most probably happy with the June cash rate decision, which is terrific, but our advice is to watch your lender to check your debt repayments are not increased regardless.”

Last week, Real Estate Institute of Australia president David Airey appealed to the RBA to consider the state of the housing market when making today’s decision. “I’m glad to see the Reserve Bank has made an accurate assessment of the housing market,” he says. “Further interest rate rises would have only been more devastating news for Australian home buyers and the strength of the housing market.”

Airey says the slowdown in the housing market is a real concern for the economy. “The RBA now needs to look at what they can do to assist in re-strengthening the housing market. One month of no change to rates is not going to do it - there needs to be stability over the longer term.”

Airey says the impact of rate rises is most evident in the first-home market. In the most recent Australian Bureau of Statistics housing finance figures, the market share of first-home buyers fell to 16.1% of all owner-occupiers in March, compared to 18.1% in February. 

“This is the lowest for five years and compares to the long-run average of 20%,” Airey says. “We have seen first-home buyers exiting the market quite rapidly and we don’t want the rest of the market to follow.”

ENDS

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