No reason for RBA to cut interest rate down

By Gerv Tacadena

RBA doesn't have any reasons to cut official cash rates.

The falling home prices, the declining rate of home ownership, and the slowing demand for properties seem to constitute the perfect recipe for the Reserve Bank of Australia (RBA) to bring the official cash rate to another historical low. However, this may never be the case.

Despite the current market downturn, prices in two of the biggest cities have remained high. In a think piece on The Sydney Morning Herald, industry watcher Jessica Irvine said home prices in Sydney and Melbourne would still remain 32% and 25% higher from where they were five years ago should values end up crashing 20% over the next few years.

She argued that while house price falls can result in a negative wealth effect, the downturn would not result in a significant change in spending amongst households, especially those who are just entering the market as prices fall.

"For households who took out their mortgages some years ago, the bulk should still feel comfortable they remain ahead on the deal, so the wealth effect is less. For buyers entering the market as prices fall, the fall in prices may actually boost their spending capacity, if they take on less debt than anticipated to buy a similar property," she said.

And even if the declines may cause a slowdown in new home building, the still strong population growth may still support demand for homes.

"And amid reports of significant backlogs of work to be done, some cooling in demand for new projects may simply provide some space for existing developments to be completed, with little impact on overall activity," Irvine said.

What could potentially impact RBA's decision to move interest rates is the fall in the jobless rate to 5%.

"Of course, until we see wages growth actually start to pick up and inflation move more comfortably into the RBA's band, it's unlikely the central bank will feel compelled to move. But the next move in interest rates is still more likely to be up than down," Irvine said.

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