Impacts of the RBA’s Latest Interest Rate Cut

Some say that it’s a breakthrough moment for the property market. Others argue that it’s too little, too late.

After many years of relentless mortgage stress for homeowners, the Reserve Bank of Australia (RBA) has finally made a move by cutting interest rates by 0.25%. As the first rate reduction since 2020, the market is reacting fast. Property investors who have been patiently waiting on the sidelines for a drop in rates are re-entering, while first-home buyers may feel a glimmer of hope as their borrowing power increases.

The real questions remain. Is this enough to ease the financial strain homeowners have endured? Will renters finally enjoy a break from skyrocketing rents?

A New Chapter for the Property Market

The cash rate undoubtedly influences spending, providing an avenue for prospective homeowners to secure larger loans. This provides renters with more opportunity to transition out of the rental market.

However, the cash rate is only one piece of the puzzle when it comes to property market dynamics.

Housing demand and price growth are primarily driven by population growth, while tight rental conditions and a persistent undersupply of properties give landlords the power to raise rents. As a result, securing an affordable rental has become more difficult than ever. The imbalance between rental supply and Australia’s surging population has become unmanageable as evident through the staggering 39% increase in rents nationally from August 2020 to June 2024, as reported by CoreLogic.

With lower interest rates, we can expect a surge in buyer activity as people rush to take advantage of cheaper borrowing costs. However, this frenzy may be short-lived as buyers come to terms with the fact that property prices are significantly higher than they were a decade ago.

The reality is that the rate cut offers only modest relief – for a homeowner with a $600, 000 loan, it translates to only a $125 reduction in minimum monthly repayments.

Could This Ease the Pressure for Renters?

Some housing advocates are celebrating the possibility of lower rents following the rate cut. However, many economists remain sceptical, arguing that it is unlikely to have a significant or immediate effect on rental price pressures.

While lower cash rates stimulate economic activity – leaving renters with more disposable income – it also drives up demand and keeps prices elevated. Meanwhile, a boost in construction may also lead to greater housing supply. With increases in both supply and demand, the effects could offset one another, meaning it is unlikely that renters will see substantial reductions in rent anytime soon.

On the other hand, renters might at least catch a break from relentless rent hikes. With reduced mortgage stress among landlords, alongside legislative changes limiting the frequency of rental increases, the pace of rising rents could finally slow down.

A Window of Opportunity for Investors

With all four major banks – CBA, Westpac, NAB, and ANZ – passing on the full rate cut to mortgage holders on a variable rate, homeowners can enjoy a modest dip in their mortgage repayments. While the cut provides some breathing room for those paying off loans, many argue that it is not nearly enough the relieve the current magnitude of mortgage stress.

According to the Tenants Union of NSW, one in four landlords do not even have a mortgage, meaning the rate cut will not make any difference to a significant portion of property investors.

On the bright side, this may be an ideal time for investors to expand their portfolio with borrowing costs dropping and rental yields remaining high. Those already in the market may also benefit from capital growth as history shows rate cuts often spark a surge in property prices.

Nonetheless, financial experts urge homeowners and investors to shop around to secure the best deals on their loan, with the lowest available rates beginning with a ‘5’.

More Borrowing Power, More Competition

Many first-home buyers might be celebrating the boost in their borrowing power. A buyer who previously had a $600,000 budget could now stretch that to $610,000 to $620,000, finally giving them a shot at getting their foot in the door.

Here’s the catch – they are not the only ones with extra borrowing capacity. Investors looking to get the best deals are also re-entering the market, driving up competition. As competition becomes fiercer, property prices could climb even higher.

The Silent Victims

While homeowners, investors, and renters weigh their options, savers could be the ones feeling the sting.

If you have been relying on high-interest savings accounts to grow your wealth, now might be the time to reconsider your strategy. With banks almost certain to slash savings rates, those depending on savings earnings will see their returns shrink.

As these savings become less rewarding, exploring alternative options such as term deposits, bonds, or even property investments could be a smart move.

The Big Picture in an Uncertain Future

While a 0.25% rate cut may seem small in the grand scheme of things, it sets the stage for a shift in the property landscape. With homeowners, investors, and renters all experiencing different impacts, one thing remains certain – the Australian property game is always evolving.

The question is now – will this be the first of many cuts, or just a brief pause before rates begin to climb again.