With the low CPI reading earlier this week, a drop in the cash rate next Tuesday is pretty much a done deal.   The question is now will the RBA cut the cash rate by 25 or 50 basis points?  According to financial market expectations (based on the ASX cash rate futures yield curve), the cash rate is likely to fall by 50 basis points by the June RBA meeting.  In fact, the yield curve is pointing to a 100 basis point rate cut by years end.

According to the RBA, the standard variable mortgage rate at the end of March this year was 7.4%, just 6 percentage points higher than the ten year average which is 7.33%.  Even if lenders don’t pass the full rate cut on (as most expect they will not), it is safe to assume that next Tuesday we will see variable mortgage rates fall below the 10 year average once again (variable mortgage rates were below average between December 2008 to April 2010, a period of significant house value appreciation).

Lower mortgage rates are certainly a positive for the housing market.  Affordability has already improved on the back of lower dwelling values (values are down 5.3% across the combined capital cities since peaking back in October 2010) and the two rate cuts in November and December last year.  Of course housing affordability will improve further after a rate cut.

Will the rate cut be enough to inject a confidence boost in the economy?  Probably.  Of course it depends on other factors, particularly how labour market conditions pan out and any announcements in the federal budget that affect the household balance sheet.  Overall it makes sense that we should see some gradual improvement in the consumer mindset which will have a positive flow on for retail sales and property sales.

Housing Finance; Petrol prices; Credit & debit card statistics
• Rate cut boosts home loans: The number of new owner-occupier housing loans rose by a larger than expected 2.3 per cent in December while the value of loans rose by 3.8 per cent. Owner-occupier loans rose by 2.0 per cent while investment loans rose by 7.5 per cent.
• The proportion of first home buyers in the market rose from 20 per cent to 20.9 per cent in December – a near two year high.
• Petrol prices set to rise: The national average retail petrol price fell by 2.7 cents to 142.4 cents a litre in the past week. However the singapore unleaded price has surged by $5.31 or 4.5 per cent in the past week pointing to higher fuel prices in a fortnights time. CommSec tips a 3 cent rise in pump prices over the next fortnight.
• Consumers say no to debt. The average credit card limit grew by just 0.9 per cent over the past year – the slowest growth on record (17 years).
• The average credit card balance rose by $16.50 to $3,349.90 in December. In smoothed terms the average credit card balance was up just 1.7 per cent on a year ago – the slowest pace in 21 months.

What does it all mean?
• Property prices might be still falling but there are signs that the housing sector is starting to turn the corner. The latest housing finance data certainly provides a degree of encouragement. Home loans have now increased for nine consecutive months and as we have been saying for some time now it does seem like it will be investor finance that does the bulk of the heavy lifting in getting the housing sector back on its feet. In fact investment loans surged by 7.5 per cent in December after a 2.7 per cent rise in November.
• Clearly the rate cuts in both November and December are providing a much needed degree of support to the housing sector – encouraging potential home buyers to get their finances in place. However it is important to highlight that housing finance is a forward looking indicator given that people get their finance organised first and as such it will be a few more months yet before that commitment is turned into stronger sales and solid pickup in activity.