May 16, 2019 by Dymphna

Three rocket boosters lining up behind the property market

Three huge pieces of news for the property market this past week.

When it rains it pours.

Right now there is a deluge of good news for the property market, and it seems very clear to me that the floor is in. The cycle has bottomed, and after a few months of consolidation, prices will start picking up again.

Booster 1: Deposit Scheme

The first ‘rocket booster’ is the bipartisan support for a first home buyer deposit scheme, announced over the weekend.

Effectively first-time buyers who can raise a 5% deposit, can tap the government for a further 15%, to get them up to the 20% deposit most lenders require (and which means they can duck Lenders’ Mortgage Insurance – LMI).

It will be available to FHBs earning up to $125,000 annually or $200,000 for couples. The scheme would commence from 1 January 2020, with half a billion on offer.

There’s a lot of details to be worked out, but with Labor rushing to support it, this is clearly price-positive for the market, especially the entry-level segment.

Booster 2: RBA locks in two rate cuts

The RBA held fire last week, but in the recently announced Statement of Monetary Policy (SMP), they subtly let us know that they thought two rate cuts were pretty much a certainty.

What they said was that the 2 rate cuts currently factored into market pricing will only be enough to get real GDP growth to 2.75% by the end of the year. That is, it was not enough to stop their growth forecast from being revised down by 25bps.

So even if we get 2 rate cuts in the coming months, the RBA’s growth forecast will still be worse than it was at the start of the year. That’s not good.

Once the election is out the way there is absolutely nothing stopping the RBA cutting definitely once, and probably twice.

Booster 3: Lenders are cutting rates

On top of all this came the news last week that major banks have started cutting rates aggressively, with ANZ and Macquarie cutting fixed rate mortgages by up to 60 basis points.

Partly this is about the banks ‘front-running’ the RBA. That is, they’re so sure that the RBA is going to cut (and they’re right), that they’re willing to beat them to the punch – absorbing a little bit of temporary margin loss for a bit of a competitive boost and a gain in market share.

However, that can’t explain all of it, and the truth is that bank funding costs have eased in recent months. The cost of capital on international markets has come down, meaning that the banks are more able to pass the cost-savings on to you.

And that’s what they’re doing.

The Triple Threat

Put it all together and you have a veritable conspiracy of factors supporting property prices and the market.

Some people are still wondering if the market will find a bottom this year.

I reckon you can almost bank on it now.