RBA Rate Decision: Could Today's Rate Cut Exacerbate 'Record High' Housing Affordability Issues?

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Key Points

The RBA has lowered the cash rate from 4.1 to 3.85 percent.
A market analyst suggests rate cuts can cause moderate property price increases.
Darwin and Melbourne are the most affordable capitals when considering median income and property costs.

The Reserve Bank of Australia (RBA) has decreased the cash rate by 0.25 percentage points to 3.85 percent, a move economists and banks largely anticipated.

The Consumer Price Index (CPI) stood at 2.4 percent in the March quarter, with the trimmed mean inflation at 2.9 percent — both falling within the RBA’s healthy inflation range of 2-3 percent, thus heightening expectations of a rate cut.

Given the close link between housing affordability and the RBA’s cash rate decisions, this much-awaited ruling could affect home prices for prospective buyers shortly.

From property market proponents to prospective buyers — anyone vested in Australia’s real estate scene looks for answers to the prevailing query: Will the rate reduction enhance housing affordability?

A chart showing the Consumer Price Index and trimmed mean inflation

Source: SBS News

Will the rate cut drive house prices up?

Property market analyst Tim Lawless said a rate cut can be a downside for affordability when you compare dwelling values to income.

He told SBS News that when prospective home owners can borrow more after a rate cut, it historically puts pressure on the housing market.

“We probably will see some additional upward pressure on housing prices as interest rates come down,” the head of research at Cotality, formerly CoreLogic, said.

“Dwelling prices relative to household incomes are already significantly stretched. In fact, they are at historic highs, and we might see that strained affordability potentially deteriorate further from here.”

He added consumers are also “increasingly pessimistic”, according to consumer confidence readings, which suggests home buyers feel somewhat locked out of the property market.

“There’s a clear relationship between confidence and housing markets,” he said.

“Purchasing a home is a significant commitment, and greater confidence in one’s job stability and ability to manage mortgage payments or secure financing would make an individual more inclined to make such a long-term decision.”

Where are the ‘healthy’ property markets?

Home buyers in some cities could be feeling more confident than others, as affordability varies widely from state to state.

Lawless said the most common metric to determine housing affordability is to compare the value of a property with household income as a ratio, also known as the dwelling value to income ratio.

“Melbourne’s got a ratio of seven, which simply means if you’re buying into that market and you have the median household income and you buy the median-priced dwelling, you’re spending about seven times your gross annual income,” he said.

“Melbourne’s down towards the bottom of the pack in terms of that affordability ratio, which is a very healthy thing.”

In comparison to Melbourne, most of Australia’s capital cities are less affordable by the same measure.

Sydney had the highest ratio of 9.8, followed by Adelaide on 9, Brisbane on 8.3, Perth on 7.4, and Hobart on 7.2.

More affordable than Melbourne were the ACT at 6.1 and Darwin at 3.9.

How much could you save monthly if the rate is cut?

If you already have a mortgage, a rate cut of 0.25 percentage points could make a difference to your household budget if the rate stays the same or continues to fall in coming months.

An owner-occupier with a $500,000 loan could save around $76 per month, according to data from the financial comparison website Canstar.

A rate cut can also be a good opportunity to see what lenders are offering customers on a variable mortgage loan, according to Sally Tindall, data insights director at financial comparison site Canstar.

Credit: SBS News

Doing research ahead of time on the offerings of different banks can be a “bargaining chip” in negotiations,” she said.

“For many people, even in the first year or two, the savings you could potentially make would outweigh the effort and the cost of refinancing,” she told SBS News.

Some banks will charge switch fees or have other costs when changing providers.

The information in this article is general in nature and is not intended as financial advice. You should consult with a licenced professional to make the decisions that are right for you.