What the RBA’s cash rate announcement means for investors
This week the RBA announced the cash rate would remain on hold for another month, now sitting at a record low 1.5% since August 2016. Some economists predicted a drop and some predicted a slight rise, however it remains stagnant and this has several effects on the real estate market and property investors. But to understand how it affects you directly, you need to understand the situation as a whole.
The Cash Rate
The cash rate is set by the Reserve Bank of Australia and decided by their Board. It is the overnight market rate at which commercial banks borrow money. The cash rate is reviewed monthly and shifts in the cash rate vary from .25 to 1.5 depending on conditions and the urgency of change.
The cash rate means that the customers of the bank are generally charged more or less for the interest on loans and conversely, make more or less on their deposits and savings. So, to put it in simple terms, when the cash rate decreases, first home buyers jump up and down because the banks are likely to pass on the savings to their customers meaning the first home buyers pay less interest on their mortgage. But while they’re doing happy dances, the self-funded retirees are doing the opposite because their monthly income is the interest earnt on deposits and savings and a drop in the cash rate means, in most instances, a drop in their income.
What Influences the Cash Rate?
The cash rate is influenced by a number of economic factors. The major influencers in the last round of discussions included the low inflation rate (1.5%) which is well below the RBA target of 2-3%. They drop the cash rate to boost economic growth and re-inflate the economy or conversely raise it, to slow economic growth when GDP exceeds expectations.
The strengthening and weakening of the dollar is another influence and right now it’s sitting uncomfortably high for the RBA, but as long as it doesn’t hit upwards of $0.80 US it’s not a serious threat. When the dollar gets too expensive, tourism declines and this takes a decent chunk out of our economy.
Another important factor is employment – or specifically, unemployment. Right now, unemployment is sitting unexpectedly high, something that is a sign of a less than prosperous economy. The latest statistics show unemployment was sitting at 5.5% in September however there is light on the horizon, the Westpac Australian Chamber of Commerce and Industry Industrial Trends Survey showed the fundamentals are indicating 2% or higher employment growth across 2017.
So what does this mean for investors?
Well, as you can understand the banks are highly integrated into the economy. Low economic performance means the banks change what they do and right now, profit is tight. This means they’re trying to get the most out of us – with very little room for movement. To combat this lack of profit generation, they’re likely to continue being generous to first home owners and seriously less so to investors. In fact, we’re already starting to see this. The National Australia Bank announced earlier in the year a new first home buyer mortgage scheme with two year fixed rates at 3.69%. Compare this to the new home loan for investors rate increasing to 5.8%.
Essentially, they’re making it more expensive to be an investor so they can make profit while encouraging first home buyers in the market. NAB may be the first one to publicise this scheme, but we’re sure more will follow.
What we have to remember as investors, is that this low rate environment will not stick around for too long and you have to make hay while the sun is shining! We’ve carefully chosen select mortgage brokers who we trust and when we work with you, we make sure you’re getting the right advice. Because right now in this economic climate, it’s not easy to start your investment journey – but if you do start now it will pay off well in the long run.