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What would an interest rate cut mean for the housing market?

With the May RBA meeting tomorrow, the general thought seems to be that there will be a rate cut; which is not what we were hearing was likely a few months ago.

The expectation towards the end of last year was that we'd see a rate rise later in this year but the economy would seem to be looking for a cut.

An article yesterday in news.com.au made a couple of good points and gave a great explanation of the job of the official interest rate.

The writer explained it like this; 'Interest rates are like an accelerator and brake for the economy. When the RBA cuts rates, it is like pressing on the accelerator. When it raises rates, it touches the brake.'

It's been a long time since the RBA lowered the rates to the record low that it is currently and it would seem that they've been hoping that the economy would have sped up due to the low rates but this hasn't happened.

Again, according to the article; 'GDP growth is low, underemployment remains elevated and inflation is weak. While unemployment looks good at 5 per cent, 5 per cent doesn't mean what it used to- the labour market is not tight enough to bring us wages growth.'

What might happen to house prices if interest rates are lowered?

Some of the likely effect is that house prices might adjust to align with their value. The skyrocketing prices we saw in Geelong last year didn't affect their value. The value of property didn't rise, just the sale prices for a period. The values seem to have held.

The effect of falling house prices (even if is result of a 'readjustment') can be homeowners' fear of feeling 'poorer'. The article explains it like this; 'Falling house prices make homeowners feel poorer, so they spend less'. This then, has a flow on effect on the economy.

Let's see what happens tomorrow.