The cash rate was unchanged at today’s RBA board meeting, holding at the record low of 0.25%, which is where it’s likely to stay until at 2023. The RBA has previously been clear that the cash rate won’t move higher until inflation is well within the 2-3% target range and labour market indicators are trending towards full employment, implying an unemployment rate around the 4.5% mark. We will get some clarity on the RBA’s economic forecasts later this week, with the release of the Statement on Monetary Policy, however earlier statements from the RBA have indicated unemployment is likely to peak around 10% in June and inflation could turn negative over coming quarters. Arguably, it’s safe to assume neither of these indicators will be in a position to trigger an increase in the cash rate target for at least the next couple of years.
The cash rate setting translates to extremely low mortgage rates. Average variable mortgage rates for owner occupiers are below 3% while investor variable mortgage rates are in the low 3% range. Fixed term mortgage rates are even lower. Such a low cost of debt is a key factor that should help to support housing demand as the economy emerges from the COVID-19 hibernation. Additionally we continue to see refinancing related activity across CoreLogic valuation platforms tracking at elevated levels relative to the same time last year as mortgagors seek out the most competitive interest rates available.
Despite such low interest rates, along with unprecedented levels of stimulus, housing markets are experiencing a swift reduction in sales activity. CoreLogic estimates for settled sales through April are down by around 40% over the month. The sharp fall in sales activity align with weak consumer sentiment readings; with consumers uncertain about their household finances, employment prospects and the short-to-medium expectations of economic conditions, their willingness to make a high commitment decision such as buying or selling a home have been significantly negatively impacted. Consumer sentiment plunged through April, recording the largest monthly fall on record.
The good news is, with Australia flattening the virus curve much more efficiently and effectively than expected, we are already seeing some states lifting social distancing policies which will hopefully see economic and housing market conditions improving sooner than anticipated.