December Rate Review

There was no Christmas gift from the Reserve Bank today, with the central bank keeping interest rates on hold at 2% for yet another month.

The record low rate has been in place since May.

Economist had widely predicted the RBA would not make a move on rates so close to Christmas, but believe a cut could come in the New Year given global economic conditions.

In his statement on the decision RBA Governor Glenn Stevens says moderate expansion of the economy continues despite a decline in the mining sector.

He pointed to a slowing of the housing market in Melbourne and Sydney where dwelling prices have moderated.

“In other asset markets, prices for commercial property have been supported by lower long-term interest rates, while equity prices have moved in parallel with developments in global markets. The Australian dollar is adjusting to the significant declines in key commodity prices.

“At today’s meeting the Board again judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate. Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.”

Dwelling values fall

The RBA decision comes as new data show home values falling in some Australian capital cities as the housing market moves through its peak.

The CoreLogic RP Data Hedonic Home Value Index for November shows dwelling values fell by 1.5% across the combined capitals in the past month.

The biggest fall was in Melbourne where values dropped 3.5%, followed by Hobart with a 2.4% fall, Sydney with -1.4%, Darwin with -1.3% and Canberra with a 0.5% drop.

Brisbane (0.6%), Adelaide (0.7%) and Perth (0.3%) were the only capitals to record increases in dwelling values.

CoreLogic RP Data head of research Tim Lawless says the housing market continues to slow in Melbourne and Sydney.

“The latest results are now placing downwards pressure on the annual change in dwelling values. The annual rate of growth across the combined capitals index peaked at 11.5% back in April 2014, and has since reduced to 8.7%.”

“The fact that mortgage rates have risen independently of the cash rate has, in all likelihood, become a contributor to the slowdown in housing market conditions, as well as tighter lending practices evidenced by a recent reduction in lender risk appetite for investment loans and high loan to valuation ratio mortgages,” Lawless says.

“Tighter mortgage servicing criteria across the board and affordability constraints in the Sydney and Melbourne markets are also having an impact on market demand.”

What the RBA decision means

Lawless says the slower conditions were likely a factor in the Reserve Bank’s decision today.

“While the cash rate remained on hold, a less buoyant housing market is likely to provide the Reserve Bank with a greater degree of flexibility in adjusting interest rates without as much risk of over stimulating the housing market as what they have faced over previous months,” he says.

“While the Reserve Bank is likely to welcome a slowdown in the rate of home value appreciation, the overriding objective would be to avoid a significant downturn in the housing market, which would act as a weight on economic growth and potentially impact financial system stability.

“Despite the stable rate setting, mortgage rates remain close to record lows which should continue to act as an incentive for home buyers and investors considering a property purchase.”

Time for borrowers to shop around

Borrowers are being urged to add lower interest rates to their Christmas wishlist and compare loans to get the best deal.

Finder.com.au Consumer Advocate Bessie Hassan says Christmas is the perfect time to give your mortgage a makeover.

“Check your current interest rate, the features of your loan, and jump online to compare what other similar products are out there – chances are you may just find a better deal,” she says.

“It’s not uncommon for banks to discount within the vicinity of 1-1.25 percentage points off their standard variable rate for new loans, and generally, the larger your mortgage the greater your bargaining power.

“If you can’t or would prefer not to switch lenders, you’ll need to demand a better offer from your current lender – speak to the customer retention department of your bank and tell them you’re not happy with your current deal. If they want to keep you, they’ll have to do better.

“There’s nothing to lose, and plenty to gain from giving your finances a health check – do it sooner rather than later to make the most of a competitive home loan market and to start saving some serious dollars.”