Today's rate cut by the Reserve Bank of Australia (RBA) could prop up the housing market, and lessen the effects of falling property values.
National Australia Bank (ASX: NAB) has already announced that it will pass on the full cut to its customers – reducing its standard variable rate to just 5.35% from 5.6%.
The other big three Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), and Westpac Banking Corp (ASX: WBC) are likely to follow.
The reason the RBA cut the official cash rate was due to recent low inflation data. A lower cash rate should mean Australian consumers increase their spending (all else being equal), not to mention borrowing activity – particularly for housing – is stimulated.
Recent reports have suggested big falls in apartment prices in Australia's East Coast capital cities of Brisbane, Sydney and Melbourne. These falls may be alleviated by increased activity in the property market, and could actually see property prices increase through the rest of 2016.
The rate cut could also spur investors and foreign residents to re-enter the market. Both groups have reportedly been exiting the market thanks to higher lending criteria for investors and reports a number of banks have ceased all lending to foreign residents.
While owner-occupiers are unlikely to take up all of the slack, first home buyers could come back into the market thanks to lower prices in some areas and for some types of properties.
Homeowners need to shop around
It's also an important reminder to borrowers to hunt around for cheaper rates. While NAB has reduced its standard variable rate loan to 5.35%, many of the bank's customers will be paying a rate around 0.7% lower than that. But even then, there are several lenders in the market offering rates of less than 4%, including NAB's subsidiary Ubank with a 3.99% interest rate for its Value Offer which requires a minimum 20% deposit.
Foolish takeaway
Sharemarket investors could also see the ASX swing higher, as low interest rates may spur more investment in equities, although investors might also want to note that banks in Europe have struggled to generate growth at ultra-low interest rates.
