Home Buyers Save Hundreds, But Will They Spend It?

The Age

Wednesday December 3, 2008

PETER MARTIN, ECONOMICS CORRESPONDENT

AUSTRALIA'S home buyers will save hundreds of dollars on their mortgages in the lead-up to Christmas after the big banks passed on most of yesterday's one percentage point rate cut.

And the cuts are expected to continue into next year, with the futures market predicting that rates will be slashed to 2.75 per cent by May, their lowest level since the 1960s.

The Commonwealth and the National Australia banks passed on in full the Reserve Bank's one percentage point cut, taking their standard variable mortgage rate to 6.74 per cent.

Mortgage holders with those banks will save close to $200 on the monthly cost of servicing a $300,000 mortgage. The cut takes the monthly savings since mortgage rates peaked in August to $570.

The cuts were not matched by Westpac and the ANZ, which passed on .80 per cent and .83 per cent respectively. Their standard variable rate stands at 6.91per cent (see table, page 12).

Commonwealth Bank economist Micheal Blythe says the combination of lower mortgage rates, lower petrol prices, budget tax cuts and the December stimulus package will boost household disposable incomes by as much as 7 per cent.

But he warns: "While household spending ability is improving rapidly, the desire to spend is weak."

Retail figures released yesterday showed a sharp decline in discretionary spending, with department store sales slipping 1.3 per cent in one month. Over the year to October, sales are down 0.6 per cent.

In the past four months the Reserve Bank has undone six years of rate rises, pushing its cash rate down from 7.25 per cent to 4.25 per cent in the boldest series of cuts since Australia was emerging from recession in the early 1990s.

The Reserve Bank board declared conditions to be "fragile, as evidence accumulates of weak economic conditions in the major countries and significant slowing in many emerging countries".

It said while the Australian economy has been more resilient than other advanced economies, activity was weakening and confidence was under pressure.

Together with the Government's $10.4 billion spending package and the fall in the dollar, it expected its rate cuts to provide "significant stimulus".

It promised to make further adjustments "as needed to promote sustainable growth consistent with achieving the inflation target".

"The bank isn't going to die wondering whether it has done enough to avoid a recession," said Commonwealth Securities economist Craig James.

The Reserve Bank made the move in the shadow of news overnight that the US had fallen into recession, joining Japan, Britain, much of mainland Europe and New Zealand.

© 2008 The Age

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