Could an interest rate cut refuel the property market?

houseThe Reserve Bank of Australia left interest rates on hold for the tenth consecutive month at last week’s meeting, however a cut could be on the cards in the coming months.

In a Bloomberg survey of 27 economists, all predicted that interest rates would remain on hold for March.

However, ahead of last week’s meeting, financial markets also predicted less than a 50 per cent chance of making it past May without at least one rate cut. But mortgage holders shouldn’t get too excited just yet.

As we have seen in recent times, a reduction in the cash rate doesn’t necessarily mean that mortgages will become more affordable. It’s possible that the banks will continue to lift their interest rates despite any decisions made by the RBA, or simply not pass on any cuts.

For this reason, another interest rate cut is unlikely to fuel the Australian property market like it has in the past and will instead serve to lift other aspects of the economy such as unemployment and business investment.

Low interest rates helped fuel extraordinary growth in the Australia’s capital cities last year, but the Reserve Bank is unlikely to want to see boom conditions repeated.

According AMP Capital chief economist Shane Oliver, who believes there may be another cut mid-year, the Reserve Bank and the Australian Prudential Regulation Authority may continue to use macro prudential controls to slow the market down if it appeared lending for housing was accelerating again.

“The regulators would probably prefer to avoid a re-ignition of the housing bubble in Sydney and Melbourne – that’s the last thing they want to see in this environment,” he said.

With housing affordability already an issue in our major cities, many will breath a sigh of relief to hear that we are unlikely to experience another property boom.

Property prices are expected to keep growing in our major cities this year, however at a much more moderate and sustainable pace then what we saw last year.