Official cash rate and property prices connection
Extract from RH Fusion Media Release: August 2016
At 2.30 pm on the first Tuesday of every month, except January, the Reserve Bank of Australia (RBA) issues its official cash rate announcement. This month, the RBA cut rates by 0.25%. The RBA is Australia’s central bank and has responsibility for the stability of the country’s currency, the maintenance of full employment, our economic prosperity and the welfare of the people of Australia.
To achieve these statutory objectives, the Bank has an ‘inflation target’ and seeks to keep consumer price inflation in the economy to 2–3%, on average, over the medium term. Controlling inflation preserves the value of money and encourages strong and sustainable growth in the economy over the longer term. The inflation rate is currently 1%, which partly explains the recent decision to trim the cash rate.
Controlling inflation through monetary policy involves determining the interest rate on overnight loans in the money market, which is referred to as ‘the cash rate’. In turn, the cash rate impacts other interest rates in the economy such as home mortgages and investment loans, in addition to impacting economic activity and the rate of inflation.
You don’t need to be an expert such as Angus Raine or Paul Clitheroe to understand there’s a clear connection between interest rates and property values – and that there are additional factors such as government policy, taxation and social trends that can impact prices. That said, while the cash rate can be a key driver of activity, it may have a different impact depending on where you own an investment property, whether it’s Devonport, Dubbo or Darwin. Indeed prices may be steaming ahead in one capital city and stabilising in other parts of Australia.
Nonetheless, the historically low cash rate, coupled with reduced mortgage interest rates, has encouraged more investor and owner-occupier activity across Australia, and is consequently pushing up demand and prices since June 2012. Again, you don’t need to be a real estate whiz to figure out the connection. If investors can access ‘cheap money’ as a result of low interest rates, then they can borrow more and invest it in bricks and mortar. On the flipside, if interest rates start to head north, money is more ‘expensive’ and fewer buyers and investors can afford to take out mortgages and purchase property – and accordingly the market stabilises.
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