Interest rates are low – but they could get lower

76tatifv1ri8l0suFrom The Desk of Helen Collier-Kogtevs, Real Wealth Australia

I must admit, my mortgage accounts have never looked healthier.

This is because in all of the years that I’ve been investing in property, I’ve never had the pleasure of paying such a small interest rate for home loans!

Interest rates are currently offered in the four per cent band, with most banks offering five-year fixed rate terms of around 4.5 per cent.

But the best is still yet to come, according to some pundits, who predict that mortgage interest rates may sink lower yet!

Read on for some analysis from the Sydney Morning Herald about where rates are headed in the next three months:

The Reserve Bank of Australia remains open to further interest rate cuts this year, despite its concerns about house price inflation in Sydney and Melbourne.

The bank also notes in the minutes of its March policy meeting that risks had begun to mount in the commercial property sector, with prices rising despite climbing vacancy rates and weakening leasing conditions.

The Australian dollar, which had been steady just below US76.40¢, dipped to US76.13¢ on the minutes’ publication, before recovering to around US76.28¢ in early afternoon trade.

The RBA opted to hold interest rates this month after a cut in February, with some commentators pointing to overheated property markets as one of the reasons.

However, the RBA also acknowledges that interest rate cuts made by central banks around the world had helped keep the Australian dollar “above most estimates of its fundamental value, particularly given the significant declines in key commodity prices”.

It said it was also prepared to wait for signs that the February reduction, the first in 18 months, was working to offset long-running sluggishness in business investment and consumer spending, which is pushing up unemployment.

“In considering whether or not to reduce the cash rate further at this meeting, members saw benefit in allowing some time for the structure of interest rates and the economy to adjust to the earlier change,” the RBA said in its minutes.

“They also saw advantages in receiving more data to indicate whether or not the economy was on the previously forecast path.”

Housing risks

On property investment, the RBA cautions that “risks in the household sector continued to be centred on housing and mortgage markets”.

“The composition of these markets remained skewed to investor activity, especially in Sydney, ” it says. However, it also acknowledges the “solid pace” of price growth in Melbourne.

The RBA said measures by the Australian Prudential Regulation Authority to maintain balance in banks’ property lending portfolios, and by the Australian Securities and Investments Commission (ASIC) to protect consumers from high-risk lending “were designed to temper the housing market risks faced both by households and lenders”.

The bank concludes with: “Taking account of all these factors, members judged it appropriate to hold the cash rate steady for the time being, while recognising that further easing over the period ahead may be appropriate to foster sustainable growth in demand while maintaining inflation consistent with the target.”

JP Morgan economist Ben Jarman agreed hot housing markets were among the reasons for the RBA’s hesitation.

“There is a sense that the very speedy rebound in the housing market indicators in Sydney [and to a lesser extent Melbourne] since the February rate cut, and a lack of any meaningful progress on a macro-prudential measures to contain it, mean the RBA is working without a net here,” he said.

“As they are uncertain about ‘the behaviour of borrowers and savers in a world of very low interest rates’, the board seems inclined to wait on the sidelines for a little while longer before delivering the next easing.” 

He said the RBA would “likely tolerate” commercial property risks “for a while”.

“We expect the RBA to cut once more, in May, though the risk tolerance around housing will be important in dictating the timing of the next move,” he said. 

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