Home loans to grow despite RBA staying put

by Phil McCarroll06 Sep 2016
The Reserve Bank of Australia (RBA) is widely anticipated to leave the official cash rate on hold at 1.5% at this afternoon’s board meeting.

The central bank announced a 0.25% reduction after its August meeting, however the prospect of back-to-back cuts seems to be out of the picture as all 38 economists and experts surveyed in the latest monthly finder.com.au RBA Survey predict the cash rate to remain put.

While general consensus is that there will be not rate movement today, that doesn’t mean future cuts have been ruled out.

Lynne Jordan, general manager – risk at non-bank lender Liberty said the RBA has likely been given some extra breathing room by conditions in the United States that are likely to put downward pressure on the Australian dollar

“There’s still no doubt another rate cut is on the cards. Completed construction levels dropped sharply in the last quarter, jobs and unemployment are showing no improvement since March and wage growth is expected to remain subdued for some time,” Jordan said.

“As we’ve seen in overseas markets, in particular, Japan, Europe and the US, monetary stimulus hasn’t produced the desired result. That suggests not only is the RBA going to have to push interest rates to even lower record levels, but there will be an increasing need for the government to use other measures such as fiscal stimulation if they are going to succeed in their objectives,” she said.

Richard Robinson, associate director – economics at BIS Shrapnel, also believes conditions in the US will play a major part in the RBA’s decision, however he also believes the central bank may be sheepish to announce another cut after the August reduction “failed.”

“The last rate cut failed on three grounds - firstly, the exchange rate was unaffected and secondly, the housing market saw an increase in sales activity and prices and thirdly, only half of the cut was passed on by the commercial banks,” Robinson said.

“The RBA should keep their powder dry for when the economy weakens in one to two years’ time or cut on the back of a rise in US rates to engineer a drop in the dollar,” he said.

Despite the fact the RBA is set to leave the cash rate on hold, finder.com.au predicts the value of home loans in Australia to increase.

“In the months directly following the last 10 RBA rate cuts prior to August 2016, the average home loan size in Australia increased seven times and the first home owner loan size rose eight times," finder.com.au insights manager Graham Cooke said.

“The average increase in first home owner loans was 1.57%, with the most significant increase in June 2016, when loan sizes increased by 3.6% (directly following the May 2016 rate cut),” Cooke said.

According to Finder, the average home loan in Australia is currently worth $360,000.