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Rates to drop 100 basis points

According to David Bassanese, a 20-year economics veteran, and writer for the Australian Financial Review the RBA will cut rates by 100 basis points over the next 12 months - taking the cash rate to 2.5%.

These predictions are broadly in line with the forecasts of some noted economists. Last week Westpac chief economist Bill Evans changed his rates forecast to two consecutive 25- basis-point rate cuts in October and November and a further 25-basis-point rate cut in the March quarter. ANZ Research is also forecasting two rate cuts in October and November with an easing bias thereafter. A quarter of the 20 economists polled by Bloomberg on Friday expect a 25-basis-point rate cut in October. The five are: ANZ, Westpac (Bill Evans), AMP (Shane Oliver), BT Financial (Chris Caton) and Market Economics (Stephen Koukoulas).

Based on his own own housing affordability index dating back to 1986 Bassanese belives house prices could rise by as much as 15% between now and late 2013 as rate cuts improve affordability. He says declining mortgage rates and high affordability were the factors behind the mid-1990s property boom. "There is a broad inverse relationship between current mortgage repayment levels and subsequent house price gains. The results suggest that as at the June quarter, the mortgage repayment as a percentage of disposable income was around 6% below the average since mid-1986".

According to Bassanese below-average mortgage rates more than offset the house prices to disposable income ratio, which is currently running at 16% above its long-run average. "If the required home loan repayment is relatively low, house prices (all else constant) will tend to be bid up," he says.

"As Reserve Bank governor Glenn Stevens once remarked, if house prices are in a bubble then they been that way for an extraordinarily long time," says Bassanese.