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Rate cuts losing their edge as house prices fall again

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Chris Vedelago

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City in grip of property slump

Melbourne's property market posts its weakest performance in nearly a generation as home prices continue to fall despite interest rate cuts.

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INTEREST rate cuts are losing their power to stimulate the property market, with concerns about the economy, affordability and the refusal of banks to pass on the full savings blunting their effectiveness, industry experts say.

Despite the Reserve Bank slashing the cash rate six times in little more than a year, demand from home buyers remains weak and house prices have ended the year in the red.

Australian home values fell for the second year in a row in 2012, marking the worst performance for the national market in 16 years.

Demand from home buyers remains weak.

Demand from home buyers remains weak. Photo: Glenn Hunt

The 0.4 per cent decline has come on the back of a 3.8 per cent fall the previous year, according to analysts RP Data-Rismark.

''Normally this far into an easing cycle things should be running quite a lot stronger than they are,'' said Shane Oliver, chief economist for AMP Capital Investors.

''Every time interest rates have been cut over the last 20 to 30 years there has been a response in the housing sector. We haven't seen the same response this time.''

Housing finance commitments have increased only 4 per cent since the RBA began cutting the interest rate last year and demand remains below the level seen during the high-interest-rate period before the global financial crisis, according to the Bureau of Statistics.

Transaction volumes and auction clearance rates are also running below historic norms, although they have shown a moderate rebound in Melbourne and Sydney over the spring.

Meanwhile, the Housing Industry Association reports the new homes market has fallen back into recessionary conditions.

''I think you have to face the fact that evidence of a recovery lurking around the corner is somewhat short of compelling at the moment,'' HIA economist Harley Dale said.

Industry experts point out that while the RBA has cut the cash rate to a GFC-era low of just 3 per cent, mortgage lending rates remain significantly higher.

In April 2009 a standard variable-rate home loan was available at 5.75 per cent. Today, the rate is set at about 6.45 per cent.

Pleading higher funding costs, lenders have increased the margin between the cash rate and lending rate from about 1.8 percentage points before the GFC to 3.45 percentage points now.

''We've only just got to a point where bank lending rates may stimulate growth,'' Mr Oliver said. ''I think we need at least to see the standard variable rate to fall to 6 per cent, which means the discounted rates available need to fall towards 5 per cent.''

Other analysts warn more rate cuts by the RBA would run the risk of further damaging confidence in the economy.

''I think people are aware that lower interest rates may make servicing your mortgage cheaper but they aren't necessarily reflective of good economic conditions,'' said Cameron Kusher, an analyst with RP Data.

''There's just a general feeling of risk aversion out there at the moment. People don't know where to put their money so they think the safety of the bank is the best place.

''Interest rates certainly aren't effective as they have been in the past.''

But estate agents insist the rate cuts are already luring home buyers back into the market.

''Inquiry for us has been up 30 to 40 per cent and we expect that to increase,'' said Paul Castran, of Melbourne-based agency Castran Gilbert. ''The market today is very similar to how it was in 2008-09. It's almost a parallel.''

Cheap credit and generous first home owner grants saw house prices soar more than 30 per cent in some capital cities in 2009-10.

With prices down only 5 per cent to 10 per cent from their peak, affordability remains a concern.

Andrew Wilson, chief economist with Australian Property Monitors, said these big price rises and the lack of similar stimulus measures meant it was unlikely the same experience would be repeated.

''Buyers are always encouraged and confidence lifts if finance is cheaper but that's not the driving force,'' he said. ''What we need is a prolonged period of economic growth that's flowing through to the whole economy. Instead, we have a patchy outlook in terms of our economic future.''

A recent report by RP Data found it was cheaper to buy than rent in only about 9 per cent of the nation's suburbs and towns.

104 comments

  • If rates hit zero for a few years like in the US it might slow down the housing crash but nothing will stop capital pouring out of the $2 trillion housing bubble.

    The RBA and property industry spruikers like Christopher Joye are going to have to answer to the thousands in negative equity:

    "Failing to recognise a $2 trillion bubble when Australia’s GDP is $1.35 trillion seriously undermines the standing and credibility of many of Australia’s so-called experts,” Prosper Australia Campaign Manager David Collyer said today."

    http://www.prosper.org.au/2011/07/19/bubbling-over-the-end-of-australias-2-trillion-housing-party/

    Commenter
    Allan
    Location
    Prahran
    Date and time
    January 03, 2013, 10:52AM
    • Thanks, very relevant.

      Commenter
      Tim
      Date and time
      January 03, 2013, 11:22AM
    • You really think that if interest rates hit 0% that the price of houses would crash....??? Sorry but you just lost all credibility!

      Commenter
      Nat
      Location
      Melbourne
      Date and time
      January 03, 2013, 11:31AM
    • Allan - interest rates have little to do with people not buying homes and everything to do with the insecurity that the Gillard gov't has brought about. People don't know if they'll have a job to go to tomorrow, so why would they committ to buying an over-inflated, poorly built new home in some far flung, isolated suburb (which is all they can even afford to look at)? The things that will improve the economy are better economic management of our federal finances & a new election so that we can finally boot out the current incompetents.

      Commenter
      chrissy
      Date and time
      January 03, 2013, 11:31AM
    • Ah good old Allan, trying to make out that Australia's housing market is exactly like America's... only without the how subprime crises, housing mortgage laws where you can simply walk away from the house and loan over there, unemployment in the US of 8-9% compared to 5% in Australia etc etc, need I go on...?

      Commenter
      Dan
      Location
      Melbourne
      Date and time
      January 03, 2013, 11:41AM
    • Where did I say the Australian housing market is the same as the US? In fact I am saying that lowering interest rates won't stop prices dropping because despite the cash rate being zero, the mortgage rate will not be zero. In the US the zero cash rate has lifted property prices. The bubble in prices in much larger in Australia and prices have a lot further to fall.

      Oh and no you cannot simply wlak away from a mortgage in the majority of US states. That has been debunked over and over again.

      Commenter
      Allan
      Location
      Prahran
      Date and time
      January 03, 2013, 11:49AM
    • Agree Dan.

      chrissy - a number of economies around the world are in terrible shape, yet you desperately are trying to put some lame (I should say pathetic) political spin on this? A minimal fall in the value of housing is no cause for that rubbish.

      Commenter
      Neil
      Location
      Bulleen
      Date and time
      January 03, 2013, 11:50AM
    • "The RBA and property industry spruikers like Christopher Joye are going to have to answer to the thousands in negative equity"

      They don't have to explain anything. That's how they get away with it. There's dozens that should go to jail for what they've done to many Australians including many in public office.

      Commenter
      JohnB
      Date and time
      January 03, 2013, 11:54AM
    • @Dan...official unemployment rate discounts those who work an hour a week, or who have not been enrolled at Centerlink....I was off work for three months but as I had savings, I wasn't officially counted as"unemployed"....and I wasn't the only one...and part timers, will NEVER get a loan for a house, but aren't unemployed, just under employed....

      Second... mortgage defaults are up in OZ in 2012....http://www.news.com.au/realestate/investing/mortgage-burden-unbearable-for-aussies/story-fndbarft-1226499423831

      No we can't simply hand the keys back, but the key challenge facing the Australian banking sector is that it has become too heavily exposed to the Australian housing market.
      http://www.macrobusiness.com.au/2011/05/australian-banks-paint-themselves-into-a-corner/

      Need I go on?

      Commenter
      shemp
      Location
      melb
      Date and time
      January 03, 2013, 11:55AM
    • @Nat.

      You understand interest rates are at near all time lows for a reason right?

      Commenter
      JohnB
      Date and time
      January 03, 2013, 11:56AM

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