Demand May Rise on Heels of Rate Drop

17 May 2012 - Chris Tolhurst from http://news.domain.com.au/

The Reserve Bank's latest action could create some movement at the entry level.

The latest 50-basis-point cut in the cash rate by the Reserve Bank looks set to stimulate sales, a welcome move that could push up prices in at least two key property categories.

Analysts expect buyer demand for entry-level properties priced less than $600,000, and inner-city period houses priced up to $1.2 million, to move up a notch or two in coming weeks.

Investors target sub-$600,000 properties heavily. Many believe, rightly or wrongly, it's better to own three $400,000 units than one house worth $1.3 million.

First-home buyers have been increasingly active in the affordable property sector since January. Given young home buyers and investors are locking horns to buy in this price bracket, the Reserve Bank's double rate cut is likely to increase the competitive tempo and boost prices.

A senior economist with the Fairfax-owned Australian Property Monitors, Dr Andrew Wilson, says investors focus on entry-level property to minimise capital inputs.

''Most investors are small investors and would rather build a portfolio of four or five cheaper properties than buy one big one and be exposed in the market,'' Dr Wilson says.

''In most city markets, first-home buyers have come back because they have to - they have to live somewhere.''

By contrast, there has been a hiatus in investment activity during the past 18 months.

Investors have been quiet because there have been affordability barriers at the entry level, Dr Wilson says. Also, bank deposit rates have been high, which has encouraged many potential buyers to bank their funds rather than invest in bricks and mortar.

Now that deposit rates are heading south on the back of the RBA's cuts to official interest rates since November, it's going to be a lot more tempting for the cashed-up to invest.

The pressure to buy will only intensify if large numbers of investors accept the growing chorus of claims from property commentators that the market has bottomed.

There are signs this is occurring. The managing director of Wakelin Property Advisory, Monique Sasson Wakelin, says interest rate cuts tend to have a disproportionate benefit for investors and home buyers because of the high level of borrowings and interest rate sensitivity in the property sector.

She says the latest cut comes at a time when city markets are entering a new property cycle after 18 months of sluggish performance, including a 5 per cent to 10 per cent national decline in values across the residential sector.

''Following the two cuts in November and December, I expect the 50-basis-point cut to magnify the cyclical upswing in the property market, delivering price growth at some point in 2012,'' Ms Wakelin says.

''I expect the boost to be felt most in the lower, sub-$600,000 price range. This is where home buyers and entry-level investors usually have the least equity, so are most sensitive to changes in interest rate settings.''

Dr Wilson believes investors are yet to re-enter the market in large numbers. ''I think what they need are clear signals of capital gain,'' he says.

Evidence of a new cycle in price growth could be waiting in the wings if the cuts to official rates - about two-thirds of which are being passed on to borrowers by the banks - work to push up prices.

There is firm evidence the market is lifting at the bottom level, a shift which is affecting positively mid-priced properties, particularly smaller inner-city period houses.

Ms Wakelin is confident the latest rate cut will spur into action home buyers wishing to trade up.

''Reduced borrowing costs will increase the likelihood of upgraders paying more to secure the property of their choice,'' she says.