Rate Cut Hopes Fade: How Homeowners and Investors Can Adapt to a Changing Market

The Reserve Bank of Australia (RBA) has indicated that it might not cut its cash rate until next year, causing a shock to market sentiment and changing lenders’ strategies. Home Loan Experts delves into why inflation remains stubbornly high and what strategies homeowners, investors and prospective homebuyers can adopt to navigate the evolving economic landscape.

The RBA’s Cautious Stance

The RBA has maintained the cash rate at 4.35% since January 2024, reflecting a cautious approach amidst ongoing economic uncertainties and persistent inflation. The RBA had suggested that rate cuts might commence in the latter half of this year; however, recent hints suggest that this timeline has been pushed into next year. This possibility emerges as the RBA grapples with inflation that is not expected to fall within the target range until the second half of 2025.

Most economists still foresee a rate-cut cycle, but the window for such a move is narrowing rapidly.

Banking Sector’s Outlook

The major banks have their own predictions regarding the timing of rate cuts. ANZ anticipates that the next cut will probably occur in February 2025. NAB, CBA and Westpac remain cautiously optimistic about a potential cut in November 2024, though they warn of possible delays due to inflationary pressures, labour-market challenges, and the impact of fiscal policies.

A quarterly inflation rate of around 0.8-0.9% towards the end of 2024 might allow the RBA to maintain the current rates. Any figures higher than this could lead to further delays in cuts. The upcoming RBA meeting in August will provide more clarity.

Factors Contributing to Inflation

Home Loan Experts cited several factors driving the persistent inflation.

Senior Mortgage Broker Jonathan Preston cited high government spending, including on the National Disability Insurance Scheme (NDIS), as a major contributor to inflation. “Government spending and immigration are contributing to inflation, making it challenging for the RBA to maintain control. Although austerity and cutting government spending may seem harsh, they are essential to tackling these pressures,” Preston explains.

CEO Alan Hemmings agrees with Preston that government spending is a key driver of inflation. He also identifies housing shortages and migration as inflationary drivers. He notes, however, that while halting migration could help control inflation, it might also lead to a shortage of skilled labour. He, therefore, looks closely at government spending. “Government benefits aimed at low-income families can provide short-term relief but also increase spending power, thereby adding to inflationary pressures,” Hemmings said.

The Stage 3 tax cuts, set to take effect in July, are expected to further drive up prices, although both Hemmings and Preston express doubt as to just how inflationary the additional money to consumers from the tax cuts will become. Preston notes that even if the cuts have no long-term inflationary effect, they “could drive a temporary spike in CPI as people start spending their extra cash”.

These various factors have prompted the RBA to adopt a more conservative approach, potentially leading to another rate hike.

Strategies for Homeowners and Investors

In light of these developments, Home Loan Experts offers several strategies for homeowners, prospective buyers and investors to adapt to the changing market conditions.

For Homeowners

Homeowners, particularly those on tight budgets, should consider opting for fixed-term loans to protect against potential rate hikes. “Securing a fixed-term loan is crucial to avoid being hit hard by potential future rate increases,” Preston notes. He also suggests looking for the best interest rates available and cutting unnecessary expenses to manage financial pressures effectively.

For Prospective Buyers

Prospective homebuyers should not be discouraged by the current market conditions, Preston and Hemmings argued. While short-term growth might be uncertain, property prices are expected to rise in the long term.

For Investors

Investors should closely monitor how new tax changes might affect their properties and maintain their current strategies if they remain viable. Hemmings emphasises the importance of evaluating whether the latest tax changes affect investment properties and urges investors to stay informed and adaptable. Preston argued that property is still a good bet. “Investing in property remains a wise decision, as the chances of losing money over a 5-10 year period are very low,” he said.

Watch Aussie Bonds

Preston also pointed out the possibility of an unusual scenario in which the RBA might increase rates while countries such as the US, Canada, the UK and Europe, are cutting theirs. As he explained, this could lead to a rise in Australian bond yields that would diverge from trends in other countries. Investors should watch these developments closely.

Your Next Step

As the RBA continues to navigate a challenging economic environment, its conservative approach underscores the importance of stability and careful management of inflation. For homeowners, prospective buyers and investors, staying informed and making strategic adjustments will be key to thriving in a market characterised by ongoing uncertainty and change.

By understanding the factors driving inflation and adopting proactive financial strategies, individuals can better position themselves to weather the economic shifts and take advantage of potential opportunities in the housing and investment markets.

Have the experts by your side. Our mortgage brokers can help you make sense of the ever-changing rate environment. Call us on 1300 889 743 or enquire online today.