Why Falling House Prices Don’t Mean A Rate Cut

This week the Reserve Bank of Australia (RBA) kept interest rates on hold for the 31st consecutive month leaving the cash rate at 1.50%. With peak to trough housing price falls in excess of 10% in both Sydney and Melbourne, many commentators have been suggesting that an interest rate cut is potentially imminent. However, the RBA been clear that unless falling property prices cause a cataclysmic slowdown in the real economy that falls in house prices are unlikely to force their hand. In fact, the RBA has welcomed the orderly unwind of what they see as over extended prices that have been funded by cheap credit.

Whilst property owners inevitably view rising property prices as a net positive, that is often not the view shared by central bankers (or those not yet in the property market). If property prices rise faster than incomes, investors must take on more debt to fund such higher prices. Should economic conditions change and this debt becomes unserviceable, the conditions are ripe for a complete financial meltdown. With this perspective in mind, it’s worth considering whether it’s rational to expect further cuts from the RBA on the back of a weak property market.

Based on current polling, it’s widely expected that we will have a federal Labor government after the next election. Labor shows no signs of abandoning it’s plans to limit negative gearing to newly built properties. In fact, last week they announced that the policy would take effect from January 1, 2020. The intention of this policy is to spur a construction boom which would improve housing affordability and also generate more economic activity. Keep in mind that ‘housing affordability’ is a nice way of saying lower property prices. The policy also removes one of the key tax advantages of owning property. Many investors have suggested that they would simply buy newly constructed properties so as not to lose the tax advantage. However, this ignores the fact that should they ever sell the property, the privilege of negative gearing would not be available to any prospective buyer, reducing the attractiveness (and therefore the price) of the investment. Why would a buyer purchase your apartment that they can not negatively gear, when they could purchase a brand new one and save on tax?

It’s apparent that the climate for property investors is going to be a lot tougher over the coming years, and that the era of property growth funded by cheap credit is likely to come to an end. Property investors can best adapt to this through focusing on the aspects of their investment that they control.

Certainty Property can ensure that the cash flows from an investment property are maximised by offering a guaranteed agreed rent, that is paid regardless of whether the property is tenanted or the tenant is in arrears. To discuss how Certainty Property can help you, please give us a call on 1300 577 298 or write to us at info@certaintyproperty.com.au