What does the future hold for interest rates in Australia?

Only-time-will-tell-what-the-RBA-will-do-with-the-official-cash-rate_157_6016587_0_14103316_300If there has been one constant in the real estate market over the past few years, it’s been ongoing debate over interest rates. Each month the Reserve Bank of Australia (RBA) keeps home buyers, sellers and investors alike on the edge of their seat, and its July official cash rate decision has been no different.

Cash rate goes unchanged

Unfortunately, the latest decision has prolonged the suspense. The RBA has decided to keep the cash rate steady at the historic low of 2 per cent for another month, continuing the run of historically low borrowing costs.

This is likely to please buyers and homeowners, who have likely enjoyed the steady drop in interest repayments since the bank embarked on its cutting mission back in 2011. The reductions have encouraged activity in the housing market, boosting residential sales and providing a solid incentive for many people to buy a house.

However, there is still a fair amount of dubiousness about what the RBA will do next. Tim Lawless of CoreLogic RP Data noted that strong price growth in Sydney and Melbourne was likely a factor in the bank’s June 7 decision. The Harbour City has seen dwelling values soar 43 per cent higher over the past three years, while Melbourne has similarly climbed 26 per cent over the same period.

This could lead to a rate rise in the future, though Mr Lawless noted that low interest rates have maintained consistent building activity – one of the most important factors in the national economy.

“In a positive sense, the strong housing market conditions have provided confidence to developers and builders which has led to a surge in new housing construction,” Mr Lawless said.

Interest rates support home building

If the bank does decide to raise the cash rate, it would need to be careful to keep this momentum going. In fact, new research from the Housing Industry Association (HIA) shows that residential construction is almost single-handedly driving economic growth. While engineering and mining construction is falling away, house and apartment building has remained in positive territory.

Harley Dale, chief economist with the HIA, said governments have the opportunity to build on this to create a broader base for economic growth.

“New home building activity and its large positive impacts on wider activity continues to form the key impetus to Australia’s domestic economy, post the resources construction boom,” Dr Dale said.

This could be something the RBA takes into account in the months ahead. In its July 7 statement, Governor Glenn Stevens highlighted that economic growth has been trudging along at a below average rate over the past year. This may mean a period of steady rates for some time yet – a positive for those wanting to buy a house nationwide.

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