Potential first home buyers need clarity on interest rates

Charlie Nelson
30 April 2012

Given that interest rates were reduced by the Reserve Bank of Australia (RBA) in both November 2011 and December 2011, plus the widespread speculation that rates will be reduced again on 1 May 2012, we would expect that most consumers would be expecting interest rates to fall over the next six months.

But more expect rates to rise than to fall!

Our Consumer Pulse survey was updated over the period 20 to 22 April 2012.  As shown in Chart 1, 37% of adults expect rates to rise over the next six months while 25% expect rates to fall.

Chart 1

When the RBA was cutting interest rates from September 2008, by November 2008 most adults expected interest rates to fall. From late 2009 to mid-2011, most adults expected interest rates to rise they did rise over the period October 2009 to November 2010 and the RBA communicated throughout most of 2011 that rates would have to rise.

The November 2011 survey was conducted after the RBA cut interest rates and expectations changed immediately.  But despite a further cut and clear messages from the RBA that rates would fall again if inflation remained tame, most adults expect rates to either rise or stay the same.

The big change in communications about interest rates recently is that retail banks have broken the nexus between the official cash rate and the rates they charge home buyers.  Clearly, some people think that the retail banks will put rates up by more than the RBA lowers them.  Perhaps, too, some people remember the link established by the RBA throughout most of 2011 that rates must rise because of the mining boom.  And the mining boom has not gone away.

Analysis by broad age group shows that it is young adults who most expect interest rates to rise (Chart 2).  As shown in our earlier report, Boomerang Offspring, people aged 18 to 29 dramatically increased their propensity to save from mid-2010 and many of this age group have moved back home with parents in recent times to save even more by cutting costs.

These potential first home buyers will be reluctant to enter the market while these interest rate expectations hold.  It is in the interests of the housing industry, the retail banks, and managers of the economy to provide clarity on future movements on interest rates.

Chart 2


Other findings

Our April survey also found that:


  • The high level of household saving is set to continue for the time being;
  • This will mean that discretionary consumer spending growth will continue to be soft;
  • House prices are likely to rise slightly given house price expectations (Chart 3).

Chart 3



The surveys are based on a nationally representative random sample of 1,200 adults per wave.  Interviews are conducted by telephone.  The survey is administered for foreseechange by Newspoll.