In an historic move, the Reserve Bank has cut the cash rate by 25 basis points to a record low of 1.25 per cent. This marks the first move in the official interest rate since August 2016, when the RBA dropped the cash rate from 1.75 per cent to 1.5 per cent.

The RBA’s statement contained a number of key changes from previous months. The RBA stated that “Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target”.

The RBA rarely cuts the cash rate once, so Tuesday’s 25 basis point cut is likely to be followed by a second cut, most likely at the August meeting. If banks do pass on the full cut, a typical borrower with a $400,000, 25-year home loan will see their mortgage repayments fall by about $55 a month.

Tuesday’s cut was not a surprise. Governor Phillip Lowe had strongly hinted that rates would be cut at today’s meeting in a speech on May 21and according to financial markets on the Monday before the RBA meeting, there was a 90 per cent chance of a 25 basis point cut. Dr Lowe will provide further insight into the RBA’s decision in a speech on Tuesday night.

House prices are not a direct consideration for the RBA when setting interest rates, but they do matter because they impact consumer spending and therefore economic growth and unemployment.

The current housing correction has occurred without sending the economy into recession, but falling house prices have weighed on consumer spending (particularly on cars and household items), the outlook for construction is weakening, and parts of the property industry are hurting due to a two-decade low in property sales.

Lower interest rates are just one of a few changes that may contribute to property price falls ending this year. The Coalition’s unexpected victory in the federal election means there will be no changes to negative gearing and the capital gains tax discount, which were likely to push prices lower.

In addition, APRA’s plan to remove the requirement for banks to assess a borrower’s ability to repay a loan at a mortgage rate of at least 7 per cent will increase the maximum amount a person will be able to borrow. And the government’s first home loan deposit scheme should also provide a boost to the lower end of the market.

There are early signs that the property market is close to bottoming out: clearance rates are at their highest point in over a year, price falls have slowed, and more people are thinking about buying. The RBA stated that “[housing market] conditions remain soft , although in some markets the rate of price decline has slowed and auction clearance rates have increased”.

Source: Trent Wiltshire | Domain