It wasn’t too long ago that the majority of media pundits were banking (pardon the pun) on one, if not two, interest rate rises in 2019. The Reserve Bank of Australia (RBA) has remained conservative on the interest rate front over the past two and a half years, opting to leave that cash rate at the historical low of 1.5%. But, it’s now faced with a new set of economic challenges it perhaps didn’t anticipate, thus turning the tables and creating a situation where the cash rate might actually need to be cut, not lifted.
The Australian economy is experiencing a (frankly) shocking run of inflation, which has been as good as non-existent in recent times. The residential housing market is seeing price falls not experienced since the global financial crisis and retailers are feeling the brunt of consumers closing their wallets.
The decline of the local housing market has put significant pressure on families and individuals across the country, with average household wealth decreasing significantly. Many are also being faced with ‘negative equity’, having purchased their home at the height of the boom, only to now have an asset that’s potentially worth less than their mortgage. It all points to a very unstable financial environment and one that scares the average Australian.
In times like these, the most likely scenario is for the RBA to decrease interest rates in a bid to encourage house price growth and consumer spending. Seems almost unbelievable given there remains significant noise surrounding the unaffordability of housing in Australia. But, unfortunately for the RBA, they need to do something to keep the economy ticking and dropping the cash rate is the quickest and easiest, and likely most effective, solution.
So, for the average Australian looking to purchase a property, be it a home or an investment, is it best to stick with a variable rate to make most of any decrease in rates, or should you fix the rate in case the economy rebounds quickly?
The answer to that question is, unfortunately, not so clear cut. It does depend on individual circumstances so it’s important to discuss the many variables that exist to ensure your loan is structured appropriately.