Finance expert David Koch has warned that rate cuts won’t make housing more affordable, while others believe the Reserve Bank is unlikely to reduce rates, despite widespread expectations that it will.
The Big Four banks and financial markets are universally expecting the Reserve Bank to cut rates on Tuesday afternoon, marking the first relief to borrowers since late 2020.
But a minority of commentators, including a former RBA board member, are cautioning borrowers against expecting a rate cut, with underlying inflation still above the Reserve Bank’s two to three per cent target.
Compare the Market calculated that a 25 basis point rate cut would enable someone earning an average, full-time salary of $100,000 to borrow an extra $11,000.
A dual-income couple on a combined income of $200,000 would be able to borrow an extra $23,100.
But Koch, the former host of Sunrise who is now Compare the Market’s economic director, said rate cuts would simply push up house prices as Australians could borrow more.
‘Rather than helping people reach their property goals faster, they may just end up paying more as a result, as bigger deposits threaten to push up property prices,’ he told Daily Mail Australia.
Finance expert David Koch has warned rate cuts won’t make housing more affordable
The financial markets are pricing in a 90 per cent chance of a rate cut happening today.
But former Reserve Bank of Australia board member Warwick McKibbin is of the view rates won’t be eased, with underlying inflation in the December quarter at 3.2 per cent.
‘I wouldn’t be cutting rates right now,’ he told The Australian Financial Review.
‘We’ve seen the problem with doing that in the US when they cut rates prematurely and now they’re going to have to backtrack.
‘That causes a lot of uncertainty and problems for the economy.’
Compare the Market worked out that someone earning $100,000 would see their borrowing capacity rise by $11,000 to $449,800, should the Reserve Bank cut the cash rate by 25 basis points to 4.1 per cent on Tuesday.
Someone earning $100,000 would be able to buy a $624,750 house with a 20 per cent mortgage deposit, compared with $611,000 now.
A dual-income couple with no kids, earning a combined income of $200,000, would see their borrowing capacity climb by $23,100 to $1,050,600.
This couple would be able to buy a $1.313million house compared with $1.284million now.
The Big Four banks and financial markets are universally expecting the Reserve Bank to cut rates on Tuesday afternoon, marking the first relief to borrowers since late 2020 (pictured is a Sydney auction)
Compare the Market based the increased borrowing power in variable rates falling to 5.97 per cent, from 6.22 per cent, which would enable someone to borrow five times their salary before tax.
Koch cautioned borrowers against using rate cuts to get into more debt.
‘I really encourage people to run a mortgage stress test before making use of their improved borrowing capacity,’ he said.
‘If you max out on your loan, you could find yourself in a difficult situation, should your circumstances change down the track.’
The banks are required to assess a borrower’s ability to cope with a three percentage point increase in variable mortgage rates.
The Australian Prudential Regulation Authority is concerned when someone owes the bank six times or more of what they earn.
But more Australians will be able to borrow at that higher threshold should the Reserve Bank cut interest rates four times in 2025, as the Commonwealth Bank and Westpac are expecting.
That would see the RBA cash rate fall to 3.35 per cent for the first time since March 2023, from 4.35 per cent now.
Former Reserve Bank of Australia board member Warwick McKibbin is of the view rates won’t be eased, with underlying inflation in the December quarter at 3.2 per cent
The $100,000 income earner would be able to buy a $669,250 house with a 20 per cent mortgage deposit – compared with $611,000 now – as variable rates fell by 100 basis points to 5.22 per cent.
This would be occurring as their borrowing capacity rose by $46,600 to $535,400.
The dual-income couple on $200,000 would see their borrowing capacity surge by $97,800 to $1.125million.
They would be able to buy a $1.407million house, compared with a $1.284million home now.
CoreLogic predicted four rate cuts would boost house prices in more upmarket and middle-distance suburbs as prospective buyers, able to borrow more, bid up prices at auction.
Parramatta house prices in Sydney’s west were forecast to increase by 17 per cent, from $1.493million now.
House prices are Mitcham, in Melbourne’s east, were forecast to rise by 15.1 per cent from $1.203million.
In Brisbane’s south, Nathan area house prices were predicted to rise by 5.1 per cent from $1.282million.