The Reserve Bank has announced a 25 basis point reduction in the cash rate, to a new historic low of 0.25% and made it clear the cash rate will remain at this level until labour markets are moving towards full employment and inflation is tracking to be within the target range of 2-3%. Under normal circumstances, such an extraordinary move from the Reserve Bank might be greeted with renewed optimism towards housing market activity. Research from the Reserve Bank points to an inverse relationship with changes to the cash rate and property prices; when interest rates fall, housing prices typically rise. This was a significant factor in the rapid value upswing in residential property from June 2019.
However the current situation of extreme uncertainty and economic fragility makes it difficult to expect housing market activity to lift against the historically low cost of debt. As the coronavirus pandemic broadens, and the probability of an Australian recession increases, consumer confidence is trending lower from an already weak position. This will likely weigh on high commitment consumer spending decisions, such as buying or selling a home.
From a housing market perspective, we are expecting housing may still be impacted from a slowdown in economic activity. However transaction activity is likely to suffer more, as buyers and sellers retreat to the sidelines until some certainty returns to their decision making. This has been the outcome through historic periods of negative economic shocks. Of course this outcome is contingent on the impact from coronavirus only lasting several months; a more sustained economic downturn would likely see households struggling with higher unemployment and underemployment. Considering that household debt levels are close to record highs, a material weakening in labour markets would likely see a substantial rise in mortgage arrears and distressed properties entering the market. We do not expect this latest move by the RBA will increase housing demand while confidence levels are so weak and uncertainty is extreme. However, in the long term we are expecting economic conditions will rebound from the pandemic-related slowdown through the second half of 2020.
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