Rate cuts will not be enough to stimulate housing recovery: RP Data

Even though all the major banks are passing on the RBA's rate cut, it is not provide enough stimulus to result in any significant turnaround in property value growth, according to RP Data research analyst Cameron Kusher.

“We suspect that consumers will remain cautious and continue to pay down their debt.

"Given this, if the cut is passed on it would likely provide welcome relief to home owners and may encourage some increase in sales activity next year, however, it is unlikely to provide a stimulant for property values to once again start increasing given the broader economic conditions,” Kusher suggests.

Kusher says if the interest rates cut announced by the Reserve Bank of Australia this week is passed on by all banks, it would provide reprieve for those home owners currently under mortgage stress.

“Undoubtedly interest rate cuts improve housing affordability."

But Kusher is cautious about anticipating any bounce from any full rate cuts.

“Although history can be a guide to the future, we feel that conditions are somewhat different this time round – property values are higher than they have been before and although interest rate cuts and value falls help boost affordability, it remains much more affordable to rent than it is to purchase,” he says.

He notes a raft of economic indicators suggest that market conditions may be somewhat different than those of the past.

• Retail trade has grown by just 3.4% over the 12 months to October 2011, which is well below the decade average growth of 5.4% annually.
• GDP data released for the September 2011 quarter this week shows that the Australian economy expanded by 2.5% over the year compared with an average expansion of 3% annually over the past decade.
• Households continue to save around 10% of their income which is at levels not seen since the since the mid 1980s.
• The total value of housing finance commitments have grown by just 4.1% over the 12 months to September and have fallen by -1.3% when refinances are removed.
• The European governments are currently experiencing a debt crisis, not to mention the ongoing weakness of the US economy.

"Given the overall cautious nature of Australian consumers and the weak economic conditions in a number of other advanced economies , it would seem unlikely that even if the Australian economy continues to perform comparatively well, credit for housing will be as freely available as it has been in the past over the next 12 months,” Kusher adds.