Cash rate stays firm till May; property crash unlikely

The Official Cash Rate (OCR) of 4.25 per cent will stay till May as the Reserve Bank of Australia discounted a property crash in the country. These developments came on the heels of the news that the bank was avoiding the US-style property crash.

A recent interest rate survey showed a majority of the 23 polled economists are seeing a drop in OCR of 0.25 per cent in the next two months; 14 of them expected a further 0.25 per cent drop in June.

Whilst majority of the economists counted on the rate cuts since last winter, they have encountered surprising moves lately. For example, only few of them had successfully predicted last month’s 0.25 per cent relief last month.

RBA has already expressed its confidence in the property market in the country. It stressed that “Australia, like many other countries, does not have the ingredients needed to create an outcome like that in the United States.”

However, the RBA also warned mortgage lenders from easing their lending practices to the levels that were seen in the US prior to the mortgage crisis. “Lending standards eased in the United States far beyond what was seen in other countries over the boom period,” it said.

The RBA expressed its confidence over the following factors that are keeping the Australian property market to its feet:
• Australia never experienced the zero-deposit loans, or 125% loans, that were seen in the UK.
• In recent years, around two-thirds of new mortgage borrowers from banks had an initial LVR of below 80%.
• Strict supervision of the lending practices in Australia than in the US. Most mortgage lending is done by firms that are prudentially regulated and, unlike in the US, there is only one prudential supervisor – APRA.
• Many Australian households pay their mortgages down quite quickly. Estimates vary, but it seems as many as half of owner-occupiers with mortgages pay it down faster than the contract requires.