Interest rate reduction predicted


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Interest rate reduction predicted

Posted on Tuesday, May 05 2015 at 2:32 PM

The decision by the Reserve Bank of Australia (RBA) to reduce the cash rate 25 basis points to two per cent today was widely predicted and is an unfortunate sign of deepening economic woes.

While the Sydney property
market continues its strong run, the majority of other capital city markets –
with the exception of Melbourne – are showing sustainable results. API editor
Nicola McDougall say the RBA has little room to move given the wider economy
continues to struggle.
“Just as the mining sector was the saving grace for our economy during the GFC,
today it’s the real estate and construction sectors that are providing some
rare good fortune,” she says.
“While many commentators may question the Sydney market, we need to remember
that that market was fairly stagnant there for the best part of a decade. We
also need to consider what shape our economy would be in without these strong
results, as well as the buoyant construction sector.”
CoreLogic RP Data head of research Tim Lawless agrees that the RBA was in a
tricky position.
“The RBA is in a tough position, aiming to drag the
Australian dollar lower and stimulate economic growth without adding more fuel
to housing market demand,” he says. 
“The Sydney and Melbourne housing markets are already responding to lower
mortgage rates. Since the previous interest rate cut in February CoreLogic RP
Data has reported auction clearance rates moving to new record highs and the
annual trend in capital gains has rebounded higher after moderating over most
of 2014. 
“The RBA is clearly prepared to look through the strong housing market results,
as they should be well aware that the high rate of capital growth is evident
only in Sydney where dwelling values are up 14.5 per cent over the past 12
months and Melbourne where values have moved 6.9 per cent higher. Every
other capital city is recording annual growth in dwelling values of less than
2.5 per cent.  With mortgage rates now moving even lower we are expecting
dwelling values will continue rising, however it’s hard to imagine the high
rate of capital gain in Sydney won’t start to moderate over the coming months
as investor demand is curbed by tougher lending standards for investment loans
and also by diminishing rental yields and affordability.”
Lawless says there is potential for stronger housing market conditions in
cities like Brisbane and Adelaide where capital gains have been relatively
muted over the past two cycles of growth.

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