Any drop in interest rates is promoted widely as “good news” for the housing market and whilst a drop in rates may on the surface bode well for mortgage holders wanting to pay down debt, the bleak reality remains, that for savers, many of whom are would-be first-home buyers, the news is not good at all according to Catherine Cashmore. She tells us why today.
Kevin: Any drop in interest rates has been promoted widely as being good news for the housing market. Whilst the dropping rates may on the surface bode well for mortgage holders wanting to pay down debt, the bleak reality remains that for savers – many of whom would be first homebuyers – the news is not always good according to Catherine Cashmore. Catherine says any long-term downward direction in rates should always be considered a concern.
Catherine, thank you for joining us. Maybe you might like to explain a little bit more about that.
Catherine: Yes. Whenever you get rates dropping, it normally sits at the bottom of a number of economic problems. It points towards a lower trend of growth, and any lengthy period of low rates is always harder to reverse because consumers generally come to rely on cheap credit. They come to rely on a low-interest-rate environment, particularly when you’re trying to boost growth.
I think it’s also important to mention – as we all know and we’ve heard it said many times before – that lowering rates is a pretty blunt instrument that the RBA has to use. They have marginal control on the banks, where the banks choose to lend that cheap credit into, because banks typically like to lend into the residential property market.
When you get a low rate and investors start to look for high yields and they start to try to hold onto the purchasing power their money before it diminishes away completely, what you get is that they start to look for different areas and different aspects that they can put their money into. That is exactly what we seen with property market.
It tends to be slightly counterproductive, if you like, of what happens into the environment. People start to get used to a low interest rate environment.
I also think that on their own, rates have a marginal influence on property prices. You really have to look at what the lending rates are doing, and the lending rates have been higher for a period of time than they were during the GFC, but you need a number of factors to collide for there to be any significant change in property prices.
Principally, you also need consumer sentiment to lift up, and you need the balls to start rolling – if you like – and people to start buying property before you start to see a lift in house prices. Then once investors get confident that the housing market has turned, then you will typically see a rush in to buy.
Kevin: The construction industry is a bit of a cot case right now, too. I think a lot of these measures are aimed at that section, as well. Catherine, is it having much impact there?
Catherine: Not at all. I think the construction industry needs long, sustainable policy decisions in the construction industry to really improve that sector of the market. The problem with new home construction is it is typically done on the fringes of our capital cities, and there is just a lack of infrastructure. Nobody really wants to buy there. Investors, first-home buyers, second-home buyers overwhelmingly prefer the established market – and for good reason. That’s really because we centralize ourselves so much around the capital cities.
What you’re finding with the construction industry is outside the first-home buyer grants that the government will implement for a time and then they’ll withdraw them, which tends to cause a boom-bust cycle in any of the new housing markets, particularly when the first-home buyer grants are concentrated primarily on new housing. That’s the only thing that tends to have any significant influence on the construction sector. I know the HIA has released a list of things that they want the government to address.
Kevin: The number of people per household has actually stopped declining, and it’s increasing again. What is behind that?
Catherine: Again, I think it’s down to affordability. There is no getting away from it. Even though, on the one hand, it’s easier to get a lower interest rate when you’re buying housing – and that obviously helps on the affordability side – I think what is happening certainly with first-home buyers is, first of all, they’re finding it very difficult to save for a deposit initially because their savings are dwindling away. It’s difficult to get any good return on savings accounts.
They’re later leaving home. People are sharing households. Particularly renters, it’s much more economical for them to share and rent a three-bedroom house than it is for them to go and rent a one-bedroom apartment.
I do think you’re going to see more of a push to people renting rather than purchasing houses, so of course, we are going to need rental accommodation, as well. That means inspiring investors to buy new accommodation as well as first-home buyers.
Kevin: Catherine, it’s always great talking to you. Thank you for putting it all in perspective for us, too.
Catherine: No worries at all, Kevin. It’s always good to be asked.