Yesterday saw Governor Lowe announce a rate cut to 1.25%, subsequently passed on in full by both the Commonwealth Bank and National Bank. The other two majors passed on a little less, with ANZ making the argument that it was starting from a point of lower rates anyway. Either way, it’s good news for those already holding a mortgage.
Today, GDP growth for the March quarter was announced as 0.4%. As a general measure of economic health, the GDP is fairly reliable (we won’t delve into a debate about declining GDP per capita here). Again, presumably, this is good news for those already holding a mortgage. Economic activity increases, and with any luck the buoyant tide lifts all boats, ensuring that those monthly payments are going towards an asset that is increasing in value.
How does the Rate Cut affect those looking to build a new home?
The rate cut will be very welcomed by those who are already in a mortgage, delivering average savings of around $700 a year for those holding a mortgage of $400,000. It’s a healthy amount of money, but it’s overshadowed by Treasure Frydenberg’s gift of $1080 apiece to around ten million taxpayers. Taken together, they are a healthy boon for those saddled with a loan.
However, for those looking at building a new home, this news is equally welcome. Reduced rates on a construction home loan and then a standard loan can only mean one thing – more flexibility in lifestyle and more choice. Whether you use the additional money to pay down the loan, push it into an offset account, or buy some new furniture for your new home, that money eases the load and gives you the freedom to act how you wish.
How do the GDP results affect those looking to build a new home?
The quarterly GDP results were slightly below many projections, but in the same ballpark. This is positive news, as we’re seeing an uptick from the previous two quarters which, annualised, point to a slight recovery in an economy that was otherwise starting to lag somewhat. Nevertheless, the outlook over the next two years is relatively flat, with no major movements in GDP figures expected.
For those people who have been steadily growing their deposit and are looking to take out a loan to build a home, a boost in GDP growth comes with benefits. On the bright side, it provides a slight boost to the housing market, meaning that they’ll be buying into an asset class that will likely see renewed interest from investors and other first-home buyers. As a further benefit, home builders won’t be competing directly with those looking to buy an established home.
Additionally, first-home builders may experience the added benefit of an increase in their own income, depending on the line of work they’re in. As economic activity increases and more money flows throughout the economy, those with elastic incomes are likely to see a rise in the money coming their way.
What’s the big picture?
The big picture is a net positive for new home builders. If you’re in the market to build a new home, lower interest rates and cheaper loans give you a better chance of getting your foot in the door, may help increase the amount you can borrow, and ensures that you aren’t spending the first period of home ownership drowning in eye-watering repayments.
Coupled with a growing economy, the picture ahead is looking good. The RBA has hinted that based on their projections of slower than usual growth (and subsequently lower than ideal inflation), they’ll likely make the next rate move downwards, possibly before the end of the year (and possibly as soon as August).
If we see the next quarter of GDP growth beat expectations (more likely than not, in my opinion), it will be even further positive news for everyone in the new housing market – either on the buy side or sell side. However, it’s worth pulling the trigger sooner rather than later. Those low interest rates are only going to add fuel to the housing industry.
Look out for headwinds
Of course, looking at two factors in isolation rarely tells the full story. There is a lot more at play in the construction of new housing, one of Australia’s largest industries. Making your investment or home building decisions based solely on an uptick in GDP growth and a simultaneous cut to interest rates isn’t something we’d recommend. Make sure you’re comfortable in your financial situation and can afford to take such a big step.