Has the RBA triggered a new property boom?

Credit: Alex Livet

The Reserve Bank of Australia’s decision to cut the official cash rate twice in the past year to a new all-time low of 1.5% could have kick-started a new property boom in Australia’s capital cities.

The central bank cut the cash rate by 0.25% in May 2016 and again earlier this month by another 0.25% taking the cash rate from 2% to 1.5%.

While the big four banks – Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) – declined to pass on all of the rate cut to borrowers, they did pass on around half of the cut, taking mortgage interest rates to ultra-low levels.

Over the past 6 months, auction clearance rates in Sydney and Melbourne have accelerated with an astonishing 86.4% of homes on auction snapped up by buyers in Sydney over the weekend. That’s the highest level since June 2015 – according to statistics from CoreLogic RP Data. Auction clearance rates captured by Domain were also high, with the real estate website noting, “Sydney is witnessing the strongest late winter home auction market on record.”

Sydney auction clearance rates 22 Aug 2016

Source: Domain

However, the high clearance rates could also be a factor of the low auction numbers according to Domain. 492 homes went to auction on Saturday, compared to 723 on the same weekend last year, when auction clearance rates were 76.4%.

Melbourne also had a strong auction clearance rate over the weekend at 77.7% from 650 auctions. Last year there were 838 auctions and a 76% clearance rate. Saturday’s auction clearance rate was below last weekend’s 79.7% – but last weekend did have far fewer auctions – just 523.

It was also the fourth consecutive weekend with clearance rates above 75%, generally a good sign heading into the spring selling season.

The RBA has played down the impact of the low rates on house prices, noting that dwelling prices have been rising ‘only moderately over the course of the year’ and ‘Growth in lending for housing purposes has slowed a little this year’ – leading the central bank to state, “All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished.”

Auction clearance results suggest the central bank may have underestimated their impact.

Foolish takeaway

The unknown factor yet to play a major part in Australia’s property markets is the considerable supply of apartments scheduled to come onto the market particularly in Brisbane, Sydney and Melbourne – which could see housing price growth weaken.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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