PROPERTY

Reserve Bank cuts interest rates to record low of 0.75%

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Recent evidence of a strong rebound in Sydney and Melbourne housing values wasn't enough to stave off a rate cut, with the RBA opting to slash interest rates further to a new record low.

A trend towards higher unemployment and a slowdown in jobs growth were likely the primary factors in the RBA's decision to cut rates to a new low, as well as concerns around persistently weak household spending, subdued wages growth and low inflation.

Lower interest rates together with a subtle loosening in credit policies and improved housing sentiment has seen national housing values recover 1.7% of the 8.4% peak to trough decline in value, with a substantially larger bounce in Sydney and Melbourne.

The rebound in housing conditions should help to support an improvement in economic conditions as higher housing prices translate to a wealthier and more confident household sector who will hopefully be inclined to spend more.

Stronger housing conditions should also support the residential construction sector where approvals dropped through the housing downturn.

Both household spending and residential construction activity have weighed on economic growth, so a turnaround in these sectors would be a welcome turn of events.

Although the housing recovery is likely to add to Australia's economic momentum, it comes amidst record levels of household debt and ongoing affordability challenges.

There is a risk that lower interest rates could fuel a further rise in household indebtedness as housing credit picks up and investors once again become more active, while higher housing prices are likely to curb participation from first home buyers despite the lower cost of debt.

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Tim Lawless is head of research at CoreLogic Asia Pacific.
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