Rate cuts losing their edge as house prices fall again
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.
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.