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0.5% rate cut a tail wind for new property cycle

May 1, 2012

In light of the very low inflationary outlook, weak GDP numbers and softening employment outcomes, the case for today’s cut was overwhelming. It will provide a welcome stimulus across the Australian economy.

Given the level of borrowings and interest rate sensitivity in the property sector, interest rate cuts tend to have a disproportionate benefit for investors and homebuyers.

Further, the cut comes at a time when we are entering a new property cycle after 18 months of sluggish performance including 5-10% national decline in values across the residential sector. Following the two cuts in November and December, today’s 50 basis point cut is likely to magnify the cyclical upswing in the property market, delivering price growth at some point in 2012.

The boost is likely to be felt most in the lower, sub-$600,000 price range as this is where home buyers and entry level investors usually have the least equity so are most sensitive to changes in interest rate settings.

In addition, this cut may spur those wishing to trade up into action. Reduced borrowing costs will increase the likelihood of upgraders paying more to secure the property of their choice.

Big Four Banks: over to you

Given the banks propensity to lift rates independently of the Reserve Bank in recent times, it is incumbent on them to pass the cut on in full. At a minimum, the banks need to pass on around two-thirds to three-quarters of the cut to see a necessary impact on confidence and buying power transmitted to the property market.