Today’s decision by the Reserve Bank to leave interest rates on hold was not unexpected, however, given the impact of the bushfires through the Christmas period and slowing economic momentum, we shouldn’t be surprised if rates are cut further in the early months of the year.
The continued low-rate environment will have significant implications for both residential and commercial real estate. A growing number of home loans are now below 3 per cent and look likely to remain at those levels or potentially fall even lower over the next six months, supporting the continued resurgence of the market following last year’s rate cuts.
The news for commercial property is more mixed, with the retail sector (which is dealing with structural headwinds of its own) particularly exposed to the kind of soft conditions currently being experienced by the Australian economy. On the other hand, the office and industrial sectors are still growing quite strongly, and a low cost of capital means prolonged investor interest for these markets, signalling price increases down the track. The caveat in this case is on the demand side, where a slowing economy will impact upon owners’ ability to find tenants and generate rental growth.
To summarise, regardless of today’s decision investors should be prepared for further rate cuts in the immediate future, continuing the low-rate environment. In our view that is encouraging news for residential, mostly positive for office and industrial, however we’re more muted about prospects for retail under the circumstances.
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