Why The Next Interest Rate Cut is Coming blog post image

Why The Next Interest Rate Cut is Coming

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We have reason to believe that the next interest rate cut is coming and here’s why.

In the recent months, the slide in property prices has become a hot topic among property investors.

The chart below was taken from a recent speech given by the Reserve Bank of Australia (RBA). It is a six-month-ended annualised chart meaning it takes the last 6 months’ data and predicts for the whole year if the pace stayed the same. So for example, if prices grew by 15% over the past 6 months, the six-month-ended annualised will be double that or 30%.

This six-month-ended annualised chart from the RBA shows how the momentum in the established housing markets is cooling down.

Housing Price Growth Six-month-ended-annualised

We can see that housing prices in Sydney and Melbourne have fallen. Sydney looks like it’s sliding at about 10% per annum, while Melbourne is at around 5%. The strength of housing prices is clearly weakening in these cities.

In Perth, the housing prices were flat in the last quarter of 2017, while Brisbane’s housing prices appear to have stabilised following earlier declines. However, it is a possibility that the movement in the bigger capitals may also drag down Brisbane’s prices in the months to come. We’ll just have to wait and see.

This six-month-ended annualised chart is basically showing us that the market has obviously entered a consolidation phase, which comes as no surprise. The Sydney and Melbourne housing markets got very hot, and with the Australian Prudential Regulation Authority’s (APRA) regulatory measures in recent months, a consolidation in prices really was unavoidable.

What will the RBA do about it?

The RBA may be prepared to let the housing prices drop for a while. However, they definitely don’t want to crash the housing market down which would have a damaging effect on the overall economy.

If Sydney prices continue to fall by 10% every year, the RBA would definitely raise some red flags. Their chart above that shows this may be their way of raising a red flag. They may be indicating that rate cuts are coming if the market doesn’t pull up in time.

Here is another chart that shows rate cuts may be on the horizon.

Auction clearance rates

This is a comparison between auction clearance rates and the timing of recent interest rate cuts. As this chart shows, auctions in Melbourne and Sydney have also been declining in the past few months.

The RBA started cutting interest rates the last time auction clearance rates were this low.

It seems the RBA has all the reasons they need to start cutting rates. They may be happy to let the prices consolidate for now, but they are definitely prepared for an interest rate cut once they see fit.

 

If you have any enquiries about property or business tax, contact a Chan & Naylor accountant near you, and we’ll be more than happy to help.

Aside from property or business tax, have a look at our other accounting and advisory services that we do to help you achieve greater success.

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Chan & Naylor Group has nationwide offices in North Sydney, South West Sydney, Sydney, Pymble and Parramatta in New South Wales, Melbourne, Moonee Ponds and Hawthorn in Victoria, Brisbane and Capalaba in Queensland, and East Perth in Western Australia that can assist you with your income tax as well as any property tax or business tax enquiry that you may have. Contact us today.

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Photo: StockPhotoSecrets

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