The Budget and rate cut positive for housing markets

Monetary and fiscal policies melded yesterday for an unprecedented double-act of co-ordinated economic stimulus.

First cab off the rank was the Reserve Bank which predictably decided to cut official interest rates to a new record low of 1.75 percent over May.

The rate cut followed 11 consecutive months with rates on hold and was a no-brainer following last week’s sobering inflation data that revealed falling prices over the March quarter and a rise of just 1.3 percent of over the past year  – well below the Banks charted target range of 2-3 percent.

The rate cut also reflected growing concerns over the national economy with signs that the peak of the retail spending and residential building cycles may have passed which have been significant contributors to recent economic growth.

The Australian dollar remains above the levels deemed appropriate by policy makers and the prospects for the international economy remain cloudy at best.

Recent tightening of lending conditions from banks may also be contributing to dampening economic demand.

Jobless data from the ABS recorded another fall over March although most of the improvement came from part-time employment growth.

Housing markets continue to report mixed results with house prices falling in all capitals except Melbourne and Hobart. Concerns regarding overheating housing markets, particularly Sydney, are clearly a thing of the past.

Last night’s Budget announcement was also largely positive for economic activity although projections for growth, inflation and unemployment remain underwhelming and perhaps even slightly optimistic.

Tax relief will act as a quasi pay increase for many wage-earners and business will also benefit from reductions in tax rates. Hopefully this will translate into higher consumer spending and investment generating economic growth.

The budget will have a largely neutral impact on housing market activity although it will certainly act to improve confidence generally.

Lower interest rate have been passed on by most banks to their customers which is a positive for home owners through reduced mortgage costs and also acts to improve affordability for home buyers.

Although official interest rates have been cut in May, the outlook remains fluid with further cuts still on the cards, particularly if the inflation rate remains low.

Overall the Budget and rate cut are clearly positive for housing markets generally although price growth will remain largely modest in most capitals and for Sydney and Melbourne in particular, well below recent year’s results.

Dr Andrew Wilson is Domain Group Chief Economist Twitter@DocAndrewWilson – My Property 2UE Fridays 2-3pm, Saturdays 1230-1pm