In December 2019, the Reserve Bank of Australia (RBA) made its final monetary policy decision for the year, leaving the cash rate unchanged at 0.75%.
As the central bank takes a break from its monthly monetary policy meeting, returning in February, now is a good time to reflect on the year that was 2019 and contemplate what could be in store for 2020.
Following the release of the Royal Commission final report in early 2019 lending regulations tightened in some areas, whilst in other areas record low interest rates made it easier for consumers to access finance.
In light of these events, and other shifting economic conditions, here are some financial trends likely to emerge in the new year.
First Home Loan Deposit Scheme could see FHBs flood the market
In August, the Prime Minister’s pre-election promise of a First Home Loan Deposit Scheme (FHLDS) was confirmed.
The impact of this short-term stimulus will be seen from 1 January 2020, with the two non-major lenders, Commonwealth Bank of Australia and National Australia Bank, gaining government approval to offer the guaranteed loans from this date.
While the scheme is currently limited to 10,000 first-home buyers (FHB) per year, RateCity spoke with one analyst predicting this scheme could see a surge of FHBs entering the market.
“When the First Homeowner Government Back Grant kicks in next year, I expect significant take up (two big lenders will have the lead), and therefore the 10,000 loans available will go quickly,” said Martin North, Principal of Digital Finance Analytics (DFA).
“This is likely to lead to the Government looking to expand the scheme based on demand, despite the fact this may also lead to upward pressure on some home prices as a result.”
The implementation of this scheme could also boost confidence in a time when wage growth is stagnant and household expenditure remains low.
Home loan interest rates could drop even lower
The year 2019 saw three RBA cash rate cuts of 25 basis points each, pushing both home loan variable and fixed rates to historical lows.
Though not been passed on in full by all lenders, the rate cuts led to a number of variable home loan rates on offer below 3 %. These rates, whilst transient in nature and therefore subject to an increase in the future, saw home loan lending lift in the latter part of this year.
Homestar Finance, a smaller lender offering variable rates as low as 2.74%, reports that it has seen a pick up in demand from both refinancers and new buyers due to these record low rates.
“The second half of 2019 has delivered three rate cuts and we always strive to deliver timely rate decisions following the RBA announcements,” said Mandy Sly, General Manager of Homestar Finance.
“This great service has seen an influx of enquiries from all borrowers, both refinancers and new buyers and we expect this demand will increase across the market if the RBA continues to cut rates next year.”
Rates starting with 2 were predominantly offered by non-major lenders and credit unions, however larger lenders like St George and NAB also dropped their variable rates as low as 3.09 % and 3.20 % respectively.
In his final statement for 2019, RBA Governor Philip Lowe suggested that further rate cuts could be on the horizon, which could mean home loan rates will drop even lower in 2020.
“Due to both global and domestic factors, it [is] reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target,” he said.
“The Board is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.”
Open banking could see consumers taking control of their data
Open banking legislation passed through parliament in August this year, signalling a new era for Australian banking. This legislation provides new rights for consumers and small businesses, and was developed to give them more control over their financial data.
The regime has been introduced as a way to increase competition in the financial industry, whilst making the process of refinancing or switching banks a much less arduous process.
From February 2020, the big four banks are required to provide access to consumer’s financial data. Although there is speculation that this will affect the average consumer’s borrowing power next year, other commentators believe the impact will take longer to materialise.
“We think Open Banking will be fantastic when it comes around, but implementation is likely to be slower than everyone expects, and it will not significantly impact the market in 2020,” said Simon Bligh, CEO of illion.
“The good news, however, is that illion’s Open Data Solutions business already offers the capability of Open Banking in a pre-Open Banking world.”
While Open Banking aims to digitise and simplify the banking as a whole, the technology used by illion is similar, but made to work in the housing market. Rather than focusing on banking, illion’s technology is used by a variety of online lenders to reduce the paperwork required when applying for financial products. These systems simplify the process of verifying income and expenses, by using industry leading algorithms to analyse financial data.
Further RBA rate cuts could lead to QE
The latest gross domestic product (GDP) figures released by the ABS show household expenditure increased by 0.1% in the quarter.
The increase was predominantly driven by a rise in spending on health, rent, and other dwelling services. Spending on discretionary goods and services, however, dropped by 0.3%.
This fall in spending on goods and services, including clothing, hotels, cafes and restaurants, suggests Australians are holding onto their income a little tighter in comparison to recent years.
The data also shows the RBA cash rate cuts may not be having the desired effect on consumer spending. This suggests that further rate cuts and unconventional monetary policy, such as Quantitative Easing (QE), might be on the cards for 2020.
Governor Lowe remained firm in his view that further rate cuts would need to occur before the RBA considered QE, and that it would only become a viable option when the cash rate reaches 0.25 %, not before.
“The threshold for undertaking QE in Australia has not been reached, and I don’t expect it to be reached in the near future,” he said.
“In my view, there is not a smooth continuum running from interest rate reductions to quantitative easing. It is a bigger step to engage in money-financed asset purchases by the central bank than it is to cut interest rates.”
If the cash rate cuts are not having the desired effect on consumer spending, and sits only 50 basis points away from 0.25 %, QE could be a potential reality for 2020.
Housing prices could continue to rise in 2020
In 2019, the cost of housing increased across the country, with five months of consistent growth and the largest monthly gain in Corelogic’s National Index since 2003.
This trend suggests that 2020 could see further increases, especially if lower interest rates fuel an increase in housing demand.
“Sydney and Melbourne continued to drive the rapid recovery, with values up by 2.7% and 2.2% respectively over the month,” said Tim Lawless, Research Director at Corelogic.
“The synergy of a 75 basis points rate cut from the Reserve Bank, a loosening in loan serviceability policy from APRA, and the removal of uncertainty around taxation reform following the federal election outcome, are central to this recovery.”
This focus on Sydney and Melbourne, and the subsequent growth of Australia’s largest cities, is something that Propertyology Head of Research, Simon Pressley, believes does not give Australians the full picture.
“When it comes to property, the human race has always been extremely short-sighted. Auction clearance rates and a quarterly change in median property values are outcomes, they are not fundamentals,” he said.
“Fundamentals to look for on the demand side include improving local economic conditions, growth in job advertisements, accelerating internal migration, local policy changes that will support job creation, a stable government, and evidence that local industries are expanding, not contracting.”
Business Insider Emails & Alerts
Site highlights each day to your inbox.