Borrowing rates are still not low enough, says AMP Capital’s chief economist, Shane Oliver, and the mortgage market won’t start to see dramatic improvements until the RBA lowers them to at least 2.5%.
Oliver says overall policy settings are “nowhere near” as stimulating as they were in mid-2009, bank lending rates are much higher – as is the Aussie dollar – and fiscal policy is being tightened rather than loosened.
“Even lower rates will be needed to boost the non-mining sectors of the economy as the mining boom fades at a time when the $A remains strong and fiscal cutbacks are intensifying.”
But standard variable mortgage rates, says Oliver, will need to fall to around 6% in order for the loan market to witness any major improvement, implying that the official cash rate needs to drop to at least 2.5%.
“This is expected to occur during the first six months of next year, with the RBA cutting again in February by another 0.25%.”
While the RBA has cut the cash rate to GFC-levels, bank funding issues mean lending rates are hovering at around 0.6-0.8% above 2009 lows.
But ING Direct CFO Glenn Baker says there’s been an improvement in this area, which is partially why several lenders have already announced plans to follow the RBA’s lead in cutting interest rates.
“In terms of our responses, we’ve started to see some funding costs reducing – but generally speaking it’s improved in terms of funding costs.”
When asked whether housing prices are likely to see a significant rise as a result of the cash rate cut – as they did in some parts of the country in 2009 – Baker said this wasn’t likely to be the case.
“I think the level of activity is relatively modest; I don’t’ think this is going to have a dramatic impact.”
Oliver says the standard variable mortgage rate, at around 6.42% assuming banks pass on around 0.2% rate cut, is below its long term average of 7.25%. Normally, however, he says rates need to fall well below their long term average to be confident of stronger growth.
He says that in a post-GFC environment marked by household and business caution, the neutral rate has likely fallen to around 6.75%.
“This would suggest that current mortgage rate levels are only just starting to become stimulatory.”
In the last two easing cycles, Oliver says, the mortgage rate had to fall to around 6.05% in 2002 and 5.75% in 2009.
“Given the fall in the likely neutral level for mortgage rates and the current headwinds coming from the strong $A, and fiscal tightening, mortgage rates will at least need to fall to these lows. Given on-going issues with bank funding, to achieve a circa 6% mortgage rate the cash rate will need to fall to around 2.5%.”
Oliver says that with inflation remaining “benign” there’s little to prevent the RBA cutting more.
“Our assessment is that the RBA will follow up today’s cut with another two 0.25% cuts in February and April.”
Should this be the case, and based on the assumption that the global economy stabilises, he says Australia’s economic growth should pick up by the end of 2013.
“One should not underestimate the boost lower mortgage rates will ultimately provide. A fall in mortgage rates to 6% from the 2011 high of around 7.8% is equivalent to around $4,500 p/a in interest savings on a $300,000 mortgage. Ultimately, some of that will be spent.”