Latest interest rate cut will be big blow for one key Aussie group
It will seem like a big win for some — but the RBA's latest interest rate cut could make life substantially harder for a big subset of the Aussie population.
Experts said those still searching for a place to call home would be steamrolled by the central bank's decision to slash interest rates by 0.25 per cent, announced at its May board meeting on Tuesday.
The official cash rate has now dropped from 4.1 per cent to 3.85 per cent.
The move, widely anticipated by economists and the money market, is the second rate cut for the cycle following an earlier reduction in February and a hold in April.
It will deliver existing homeowners a lot of savings on their repayments but it is also expected to supercharge the property market and leave would-be buyers even further behind.
The cut could pour fuel over an already heating housing market and drive up prices, with much of the increased competition expected to come from investors and upgraders, economists revealed.
All this will coincide with a still frantic rental market that will make it harder for new home buyers to save fast enough to match price rises.
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Gareth Croy, director of financial services firm Your Future Strategy, said first-home buyers are going to be 'chasing the market'.
'Another cut, plus more cuts later this year, could boost the average buyers' borrowing capacity by about $75,000. And we could see that amount added to prices by Christmas,' he said. 'Rate cuts do create this fear of missing out that can push prices up.'
PRD chief economist Dr Diaswati Mardiasmo said the recent cut and subsequent cuts would make it harder for aspiring first-time buyers to get into the market in the coming months.
'First-home buyers who are ready to purchase right now might get some benefit from cheaper rates but those with longer-term plans are going to find it a lot harder,' she said.
'Part of the problem is that someone who isn't in the market yet will see their ability to save diminish because there is still high rent and high living costs and three or more cuts this year will push up the price they will pay for their home.'
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The brutal twist is that those trying to save for a deposit could be hit twice.
New research has found that the majority of Aussies are still banking with the same institution they joined as teenagers — often on outdated savings accounts with lacklustre interest returns.
Banks have also historically been very quick to slash interest rates on savings accounts.
With rates now slashed even lower, their hard-earned deposits are soon to be earning a lot less.
KEY BANKING MISTAKE EXPOSED
The polling by comparison group Finder.com.au revealed 51 per cent of Aussies were sticking with the bank they joined as children, often in accounts set up by their parents.
The research found 55 per cent of women were still with the same bank they had as a child, compared to 47 per cent of men. The trend was prevalent across all generations, with almost one in three baby boomers (30 per cent) still with their very first bank.
Finder personal finance expert Sarah Megginson said these Aussies were likely missing out on a better deal.
'You can be sure there's a better rate available than the one on the account your parents opened for you as a child,' she said.
MORE: 'Fuel to the fire:' looming rate cuts big downfall
'You might think your existing bank is 'good enough', but if you're not earning interest, it's your bank balance that is missing out.'
It comes as additional modelling from Aussie Home Loans found that rising prices would likely outweigh the benefit of lower interest for first-time buyers.
Those who bought next year could be stung with an additional $77,000 in costs over the life of their loans, the Aussie analysis found.
RISING ANXIETY AMONG FIRST-HOME BUYERS
Some first-home buyers say they are fearful of what the future holds.
James Martin and Liz Upcroft, both 28, plan to buy a home later this year or early next and said they were concerned price rises could be too fast.
'Rate cuts are fantastic for people who already bought but for someone looking to buy at the end of this year, it's a bit of a worry because prices could go up a lot. It's a catch-22,' Mr Martin said.
He added that the prospect of getting priced out the market had encouraged them to consider the government's First Home Guarantee Scheme, which will allow them to buy with only a 5 per cent deposit.
'I feel like if we wanted to get a 20 per cent deposit, the interest rate cuts would affect our savings and it would be a lot more of a problem,' Mr Martin said.
IMPACT OF PREVIOUS CUTS
Mortgage Choice inner west broker Chantelle Rangel said similar cuts in interest rates had heated the housing market in the past and this trend was already looking to be repeated.
'I've never been this busy before,' she said. 'What's interesting is, we've had a significant increase in investor pre-approvals as well as people wanting to purchase in their self-managed super funds.
'There is always a frenzy of demand as soon as rates drop … We experienced many buyers who were sitting on the sidelines due to affordability re-enter the market after the last rate cut.'
REA Group economist Anne Flaherty said a similar trend even occurred when rates were last cut in February.
'Following February's rate cut, buy searches on realestate.com.au jumped, consumer sentiment saw a significant recovery, and home price growth picked up,' she said. 'A rate cut in May is likely to have a similarly positive impact on buyer demand and confidence.'
Peter Kelaher, director of buyer's agency PK Property, said in a note to clients that the experience of previous rate cuts suggested a wave of demand was coming.
'When interest rates come down, the natural human reaction in most cases will be to borrow as much money as you can,' he said.
'And what does that mean? It means one thing: people can throw around more money to be competitive at auction, and in general, the property market.'
Owl Home Loans director Aidan Hartley said rate cuts had already driven a huge influx of buyers seeking approvals.
'I've been doing this a while and I've never been thrown as many contracts from new buyers,' he said. 'There's a big sense of urgency because a lot want to get in (to the market) before cuts because they're taking out variable rates,' he added.
Compare the Market property expert Andrew Winter said a rate drop at the RBA's Tuesday meeting would likely push prices up again.
He explained that cheaper credit would lead to bigger offers on properties, particularly in highly sought after areas.
Mr Winter said aspiring buyers may be anxious to 'get a foot in the door' now before market conditions become too competitive. He said the capacity to borrow more money would not make buying a house easier for most people.
'The main hurdle for most first-time buyers is raising a deposit which can be extremely challenging when value growth outpaces wage growth in such an extreme way.'
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