News - 5 Feb, 2019

Cash rate holds as auction activity rises and high tier property prices fall

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The Reserve Bank of Australia (RBA) has left rates at 1.5% for another month, as the Australian property market continues to fluctuate. By leaving the cash rate on hold for February, the RBA aims to strengthen the domestic economy amidst property market shifts.


eChoice RBA Commentary for February 2019

The official cash rate stays at 1.5% due to:

  • Inflation sitting at 1.8%;
  • The Australian dollar falling to .72c US;
  • Unemployment increasing to 5.1%; and
  • Sydney and Melbourne home prices continuing to fall further, reducing combined national averages.

Two of the most notable changes in the Australian property market over the last three months include a rise in auction activity and expensive property price falls.

What is the overall impact of these factors on the economy and you as a homeowner or buyer?

Australian auction culture and the cash rate

Auction activity and the cash rate are linked. In fact, each feeds the other.

This is because low-interest rates drive competition at auctions, encouraging homeowners to use the auction strategy when selling to give them an opportunity to increase their sales price and profit.

When making a profit, typically a homeowner will use this capital to reinvest by either buying another property or purchasing goods and services. This approach, in turn, contributes to the Australian economy, which is influenced by the cash rate.

Some extreme examples of auction profits include sought-after Melbourne and Sydney homes selling for twenty, fifty, and even hundreds of thousands over their reserve prices. For an owner-occupier, this sale equates to a tax-free profit’, which would be difficult to replicate using any other investment strategy over the same duration.

So, what does this information mean to the average homeowner?

Current auction data

If you’re looking to sell your home and you reside in a desirable area, then auctioning your could be financially beneficial. According to CoreLogic’s Quarterly Auction Report, a significant increase in Australian capital city auction activity occurred over the December 2018 quarter.

Data reveals that some 25,894 homes went to auction in combined Australian capitals during October, November and December 2018, compared to just 20,653 over the September 2018 quarter. However, when compared to the December 2017 quarter data (32,408 homes auctioned), present numbers are considerably lower.

But, before you rush out and list your home, you also need to consider that auction clearance rates have fallen across Australia. CoreLogic data shows that over the December 2018 quarter the combined capital auction clearance rate fell by 10% to just 43.6%. In the previous quarter, the clearance rate sat at 53.6%.

City
Clearance rate
Auction volumes
Suburb with highest no. Of auctions
Highest suburb volumes
Adelaide
48.5%
1,423
Prospect
33
Brisbane
31.8%
1,642
Camp Hill
39
Canberra
46.9%
1,090
Griffith & Narrabundah
32
Melbourne
45.4%
12,372
Reservoir
216
Perth
25.0%
499
South Perth
15
Sydney
43.1%
8,828
Mosman
126

December 2018 quarter, capital auction clearance rates and volumes. Source: Core Logic RPData

Why are auction clearance rates falling?

There are many reasons why Australian auction clearance rates have dropped, and most hinge on economic policy, political outcomes, and the economy as a whole.

Firstly, while APRA, the Australian banking regulator, removed interest-only lending restrictions on January 1, 2019, it will take some time before this change has an impact on auction clearance rates or market prices.

Secondly, a federal election looms, which always creates turmoil. Lastly, the banking sector final report from the Hayne Royal Commission could increase risk. These three factors are impacting dwelling prices, especially those at the higher end of the market.

Australia’s most expensive property prices tumble

Over the last twelve months, home prices across Australia dropped by 4.8%. But when this data gets divided into property value tiers, the greatest drop in home price is found in the highest tier – Australia’s most expensive property, valued at over $1.1 million.

RBA February cash rate

This tier recorded falls of 9.6% during 2018, whereas property in the lowest tier – homes valued at under $262,000 – recorded a price increase of 0.9% over the same period.

Based on this information, economists suggest that the Australian housing market is strongest in the most affordable tiers. Further driving this market’s strength is first home buyer activity and lending constraints in the high tiers.

How to make the most of the low cash rate and falling property prices

Low-interest rates make buying a home more affordable, as do falling property prices. So, if you’re looking to buy or build a new property and you have your finances in order, then now could represent the perfect opportunity.

If you’re a first home buyer, consider government grants and how much you’ll need to save for a deposit. You should also review your borrowing capacity and consider paying off any outstanding debts to increase your capacity further.

Of course, if you’re unsure, then ask for help. Often a mortgage broker can answer all your questions, and they can help you to work out your borrowing capacity, government grants and other pressing issues.

Overall, if you’re interested in selling your home or buying a new property, it’s crucial to conduct thorough market research before making any move. Don’t fall into the trap of selling below your asking price or reserve or making a purchase above market value at a private treaty or an auction because you let your heart rule your decision. Instead, keep a level head and know what numbers you need to make buying or selling a property a reality.

Thinking of cashing in on the buyers’ market while rates remain low? Now may be the time to discuss your options with an eChoice mortgage broker. We have access to hundreds of products across a panel of multiple lenders, so we can help you find a competitive mortgage.

Compare your interest rate today.

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