With months of speculation that there would be further rate cuts, the RBA has once again stunned with their decision to keep rates on hold. But was it really a surprise? The experts don’t believe so.
The RBA had numerous reasons to keep rates on hold with the market fluctuating at rapid speeds last month – record house prices and record demand. There is no doubt that February’s decision to cut interest rates to an all time low impacted the market dramatically in a perhaps, unanticipated way. It was only time before the RBA heeded the warnings and took a step back to reflect on the effect of recent decisions.
At the end o the day, cutting rates is only a temporary solution to the problem. it fails to get to the core of the issues affecting the Australian economy – and that should be the real concern. This ‘Band-Aid effect’ only mass the problems and issues, whilst in reality – unemployment is still high.
Much in the same tune, JP Morgan chief economist Stephen Walters states, “We think the core problem is the lack of productivity, the dysfunction in government, lack of clarity on budget, short-terminism around state governments and all the things that the cash rate going down doesn’t really help.”
Now the issue with a booming house market is two-fold. On the one hand, it creates cheaper rates and more investment. But the issue is we could potentially be faced with a situation where demand overtakes supply. When the housing bubble eventually bursts – which we predict could be soon as the RBA will eventually hold or even increase rates – it could trigger a fire sale and we will be left with an over-supply of properties.
Buyers need to be aware that it is unwise to buy beyond their means at this time no matter how attractive prices may be. If the RBA does go ahead with further rate cuts, it will be responsible for lulling people into a false sense of security and left stone cold when interest rates eventually increase.
You need only take a look at what the banks are doing right now. Banks are already supplying loans on a 2% contingency basis in preparation for when rates increase, money will still be secured.
Furthermore, have the cuts actually solved the problem they were trying to address in the first place? Cuts have only been fuelling investors like a shark to its prey, while potential home owners sit idle in the rental market waiting for more stable times.
So with all that being said, it does seem unlikely the RBA will make any further cuts and if it does, it would have put up a strong fight against a very legitimate argument to keep rates steady.
Let us know what you think in the comments below. Should the RBA make further cuts or keep rates on hold?
For more information and advice with regard to investment properties, please don’t hesitate to get in touch with the team at Fortis Accounting Partners. You can reach us on 02 9267 0108, or via info@exemplary-financial.flywheelsites.com.
