The Rate Cut – good news? Or Bad news?


The Rate Cut – good news? Or Bad news?

Once again the drop in interest rates has been promoted widely as “good news” for the housing market, with Wayne Swan taking ample credit as he attempts to persuade public ears that record low rates are solely down to “responsible” fiscal policy. To assume this is a reaction to a number of concerning economic indicators would be ‘grossly inaccurate’ we’re told - with Wayne Swan assuring the voting public that “Australia's economy is resilient.”  

You could be forgiven for believing that we’re living in an environment similar to the old fable “The Emperor’s New Clothes” with only a few short months ago seemingly believable tales of an early return to surplus widely circulated until the pure nakedness of the situation, to the tune of $17 billion was revealed. ‘Woops!’ sorry about that.

And whilst a drop in rates may on the surface bode well for mortgage holders wanting to pay down debt, the bleak reality remains that for savers, many of whom are would-be first-home buyers, the news is not good at all.

Any long term downward direction in rates should always be considered a concern – they sit at the seat of a number of economic problems, and point firmly toward a trend of lower growth. Furthermore, a lengthy period of low rates is harder to reverse as consumers come to rely on cheap credit, unsustainable at higher levels should a ‘bubbly’ environment call for a reverse course of action.

As a tool, they are limited in their effectiveness for stimulating the economy pushing yield seekers into riskier assets. Since the global economic crisis, the world’s banks have been concentrated on lowering rates in order to boost growth. The textbook model indicates the atmosphere will motivate an increase in lending for such items as homes, goods and services; however monetary policy is a pretty blunt instrument and understandably in our post GFC environment, the appetite to reduce debt and accelerate payments on outstanding mortgages has been far greater than the push to consume.

In the UK, putting aside the London housing bubble inflated principally by foreign investment - the housing market has been broadly stagnant.  As with Australia, vendors – have chosen to hold, rather than sell for diminishing nominal returns.  Talk of lowering rates into negative territory and dangling carrots in front of first home buyers by way of ‘Help to Buy’ equity schemes are all last ditch temporary measures to artificially prop up prices which critics emphasise will do little to address affordability in the long run, and artificially inflate prices in the near term. Yet akin to a doctor prescribing placebos, short term relief is better than a long term cure – particularly when approaching election.

As I mentioned previously, although it may seem logical to assume lending rates initiate price changes, other economic factors play a far greater influence, and unless the needed ingredients are combined, interest rates on their own can do little to change the terrain by any significant sustainable degree.

Furthermore, whilst Governments can allocate at their discretion where to spend our tax dollars and pressure the banks to ‘pay forward’ the rate cuts gifted,  they have limited influence on where cheap credit is spent (or for which asset it is lent) into the economy or to direct it into areas where it’s needed most – principally construction.  The banks decide at their own discretion where to make their loans, the majority of which are directed towards the established real estate market, over and above other areas such as job-creating businesses.

Since November 2011 we’ve had 7 drops to the cash rate – passed on ‘in part’ by the banks.  To date it’s failed to evoke any significant improvement to the construction industry with the latest data showing a 35 month consecutive contraction - the fastest rate since September 2012.

Established house prices have also been slow to respond– it took until mid 2012 for any marginal improvement in median values to emerge (principally boosted by consumer confidence,) and only recently have we seen any significant uptick. Albeit, throughout the period, growth in ‘private sector housing credit’ has remained weak and transaction levels low by historical standards.

Melbourne - recorded its strongest first quarter since 2010, however once adjusted for inflation we still sit -11.2 per cent below peak values with a promised ‘softer’ second quarter. According to RP Data, capital city values in real terms have moved little since September 2007.

The new home market sits in a dismal glut.  Last week the HIA released 50 “action strategies” focusing on the economy, taxation, industrial relations and ‘red tape’ in an attempt to lobby Government to allocate a greater proportion of the federal budget to addressing the issues which they assess are needed in order to advance ‘sustainable’ recovery.

Part of their campaign focuses on our ‘housing shortage’- and whilst there’s no doubt a growing population will require an increased surplus of accommodation, ‘population forecasting’ focuses on a number of ‘assumptions’ which are always subject to change. 

For example, between 2001 and 2006, census data indicates we’ve reached a point where number of persons per household has stopped declining and is once again increasing – no doubt in part due to the rising costs of living and accommodation.

The results show how household size has increased from 2.4 people per dwelling to 2.66 in the five interim, and although a few 0.01 percentage points may seem insignificant, this figure is used to calculate ‘underlying’ housing demand, therefore, even a small shift of 0.01 per cent can result in a ‘needed’ reduction of almost 30,000 dwellings. 

Albeit, there is little point building a surplus of homes unless it can be assured the consumer (mortgage holder) will respond, and in this respect, the key issue to our shortage of housing lies in effective planning for population growth, which I’ve argued more than once, cannot be combated from simply building an excess of ‘roof space’ alone – or for that matter, dropping interest rates to historic lows.

To date, the only solution offered has been the channelling of first home buyer grants exclusively into the ‘new’ market – in other words, if no one else will buy it, throw smarties to our most price sensitive demographic and see if they will take the bait - an unsustainable irresponsible policy producing dismal results.

From a home buyer’s perspective, using their hard earned ‘deposit’ to purchase into a ‘new housing estate on the city fringe, where land is in abundance, is quite simply not worth the effort once travel costs and failed promises for the provision of infrastructure have been calculated. Nevertheless without recovery in construction, it remains that any surplus of credit will be poured into the established sector – principally lead by investors fighting over the same dwindling pot of existing dwellings.

Viewing housing as merely a tool to build wealth and drive the economy takes a fair amount of manipulation yet this is the reality. According to RP Data, tax revenue generated from property taxes alone, account for a collective 46 per cent of total revenue for local and state government. In the recent Victorian State budget, it was revealed ambitious plans for a new east west link are in part reliant on an increase of 33 per cent to 37 per cent in property related taxes.

In a statement to The AGE, the property council of Australia warned "Any budget that relies on property taxes to pay for 40 per cent of the bills is too dependent” – and it’s been noted that the prospected increase in transactions needed to fund Victoria’s bills is somewhat ambitious considering it was only a few weeks ago in the RBA’s  Financial Stability Review that  Melbourne’s property market was singled out with specific warnings of a ‘softer outlook’ ahead.

The long and short remains that Australia is pinning its future outlook on a robust housing market with both the RBA and Treasury looking towards the construction sector to fill any void from a slowdown in mining.  And whilst low interest rates can keep the mantra to first home buyers going that ‘housing affordability is at its best level in a decade,’ despite prices continuing to rise, then the only way affordability can be sustained for those entering the market, is if the RBA hold down the cash rate over a lengthy period as seen in the UK and USA.

All things being equal, this option may sound feasible – however, equality in is not under the control of either the RBA or Government when they cannot dictate where a larger supply of cheap credit is directed. 

Without addressing the real issues causing weakness in the housing sector, it encourages central banks and investors to believe that market manipulation is the only feasible answer. Should a bubbly environment start to emerge in an atmosphere where low rates have become the norm, a favourable outcome will be far harder to wield than may be imagined.

Catherine Cashmore 

Our Services

Buyer Advocacy

Buyer Advocacy

Whether you want us to bid at auction, or provide a comprehensive buyer advocacy service to search, asses and negotiate your ideal investment property or home, we tailor a plan ideally suited to your individual needs.

Read More


We have the expertise to assist with any type of development you are considering - large, or small - from concept to completion.

Read More

What our Clients are Saying

Catherine worked tirelessly in finding me a great property at a good price. She did things that I wouldn't have done (hours and hours of legwork) and more importantly, couldn't have done (organising the purchase before anyone else had even put in an offer). When I was ready to give up, Catherine kept working. I'm certain that I never would have been able to buy the same property within 10k of what we eventually settled at.... David
The expertise you bring are excellent and helped us understand the process and what to do and what not to do. You discussed at the beginning that by using you it will save us money and in our instance and the current environment of Melbourne’s market I believe you saved us $100,000 or enabled us to get into a suburb which going to auction would have gone way over our limit. You worked tirelessly to help us purchase a home.... Karen
“You impressed us from the start, especially compared with the other buyers agencies we approached…” - Raj

More Testimonials

Why use Cashmore & Co?

Our advocates and researchers are international experts on market and real estate cycles. 

With decades of experience working in the Australian real estate market Catherine Cashmore and her associates have lectured widely on the real estate cycle and the economics of investment.

Cashmore & Co use their expertise to assist investors, home buyers and developers.  They simplify the buying process saving buyers thousands in negotiation, as well as preventing costly mistakes.

Cashmore & Co's services and expertise will not only assist you to increase your wealth, but also educate you to become a better investor.

Please click here to see the range of services we offer. 

Or contact us for more information. 

About Catherine

Catherine Cashmore


Herald Sun Pic .jpg

Catherine Cashmore has been working in the Australian real estate market for over 14 years. As a buyer advocate, she has assisted hundreds of Australian home buyers and investors to secure quality real estate for the best possible price. Originally from the UK, and having lived in the US, Catherine is a seasoned traveller who has extensive experience across a range of international real estate markets for those interested in property investment overseas.. 

As President of Australia's oldest economics organisation, Prosper Australia, Catherine is a regular and highly respected media commentator and often called upon to give guest lectures to university students (including RMIT and Sydney University) on how tax policy affects real estate, the design of cities and the economy.

She is editor of Port Philip Publishing’s 'Cycles, Trends, & Forecasts' – a publication that teaches real estate investors about the land cycle and its effects on the economy. She is author of ‘Speculative Vacancies’, the only study in the world that analyses long term vacant housing based on water usage data (Melbourne focused). As such Catherine has an in depth knowledge of the Australian real estate market, few can rival.

You can contact Catherine directly on 0458 143 089 or at



Meet the Team

Please contact us for more information
or call us on +61 458 143 089

Contact us for More Information

Contact Us