Even though we hear about the cash rate a lot in the news, there is often some confusion as to what it actually means. It’s important to understand what the cash rate is and then how its fluctuations can impact you.

What is the cash rate?

The cash rate, set by the Reserve Bank of Australia (RBA), is the interest rate banks pay to borrow funds from each other. The RBA uses the rate as a tool to maintain the strength of the Australian economy – increasing, decreasing, or maintaining the cash rate to influence Australia’s monetary policy.

The cash rate increasing reflects the need to tighten the policy; if it decreases, this means an easing of the policy.

On the first Tuesday of every month (except for January), the Reserve Bank Board meet to review the cash rate and release a statement that afternoon outlining any changes. The cash rate can go unchanged for periods of time, as was the case recently, with the increase announced in May 2022 being the first change in over a year.

How is it set?

As you can imagine, a lot of factors go into deciding whether to move the cash rate. Inflation plays a big part in decision making, the board has a medium-term inflation target of between 2-3%, and when inflation is considered too high, the RBA might decide to raise the cash rate so Australians maintain our buying power.

Australia’s economic growth is another major factor. If it’s slowing down, as it did when COVID-19 reached our shores, lowering the cash rate can encourage spending and borrowing, stimulating the economy. Then there is also the international economy that can influence the decisions, because if there is strong international economic growth, this can boost demand for Aussie products.

Unemployment is another aspect they need to consider, as this reflects how well the economy is performing. Lower interest rates stimulate the economy through spending and investing, the RBA might choose to lower the rate when unemployment is high with the aim of creating new jobs.

The impact of fluctuations

Whether you are currently saving up to buy or already have a mortgage, the cash rate will likely impact your financial situation as it often directly relates to interest rates.

When interest rates fall, you can be in a better position to buy or pay off your mortgage. If you are on a variable rate loan, you can take advantage of the savings you will make. On the other hand, if you are on a fixed rate, you’ll be less impacted by the rise in interest rates.

However, you may be buffered by your lender, as banks are not required to pass on cuts to their customers in full.

It’s also worth being aware of the cash rate and its impact on the housing market. With lower interest rates, borrowing costs are lower which can increase competition to buy property, which in turn can drive up property prices. Depending on your position as a buyer or seller, this may work in your advantage or stall your plans.

A rising cash rate tends to put the brakes on the housing market as borrowing costs increase with interest rates. While this is bad news for mortgage holders, it’s good news for savers as you can expect better returns, so if you’re in the position to do so, upping your savings targets is a wise idea.

The RBA’s statements on the cash rate are available on their website if you’re interested in following the trends and getting the latest updates.

For tailored advice as to what the changes mean for you and your financial goals, get in touch with us today.

We’ve all heard of the dangers of emotional spending but what about emotional saving? Emotions can wield a powerful influence on our personal finances in a positive way, but they can also have a negative impact on where we sit financially. The good news is, by cultivating a bit of self-awareness you can harness your emotions and ensure they help you achieve your financial goals.

Whether your goal is a big one like saving up a deposit to buy your own home, or a more modest splurge to take off on a much needed holiday the best laid plans can be derailed, if you follow your heart rather than your head.

Our decision-making abilities – from those big life changing financial decisions, to the small “treat yourself” purchases – are strongly influenced by how we are feeling at the time. Marketers know that we are not just buying ‘things’ – we buy (or try to buy!) space, love, happiness, freedom… the list goes on.

Developing awareness and discipline

If you find that your spending is influenced by how you are feeling, you are not alone. The most common trigger for overspending is stress, with 29% of people surveyed splashing out in response to stress.ⁱ It’s not just stress causing us to overspend though. In the same survey, sadness was cited by 13% of respondents as a reason for buying up big, with sadness also considered to lead to particularly extravagant purchases.

This so-called “misery is not miserly” phenomenon is backed up by a study where participants who watched a sad video offered to pay nearly four times as much money to buy a water bottle than a group who watched an emotionally neutral video.ⁱⁱ

Getting that warm glow without spending a cent

The best way to counter an emotion led-spending spree is to be aware of how you are feeling and acknowledge that the buzz you get from your purchases is unlikely to last longer than leaving the shopping centre carpark. Think about other things that make you calm and happy that don’t involve spending money, like having a chat with a friend or going for a long walk.

With cost of living increases and interest rate rises putting pressure on household budgets, it’s also a good idea to keep track of your spending and having a set budget with some allocation for the odd splurge will help you put some limits around your spending while not feeling totally deprived.

Keeping emotion out of investing

Negative emotions don’t just cause us to overspend.

Emotions such as envy and greed can drive risk taking behaviours like gambling or investing in ventures where you stand to gain a lot if successful, but could lose the shirt off your back, if the risk does not pay off.

Fear also commonly drives investment decisions but panic selling when the stock market takes a tumble can mean you lock in your losses and lose the benefit of the rebound that inevitably comes over time. Having a plan in place can ensure that you make considered decisions and think through any possible opportunities carefully. Investing is one area where you certainly need to be thinking with your head and not your heart.

Harnessing emotions to help you reach your goals

On the flip side, positive emotions can be a strong motivating force when it comes to personal finances. It has been proven that people save as much as 73% more when they have an emotional connection to their goals.ⁱⁱⁱ

The trick with this is to have something quite tangible that you are hopeful for or excited about, to work towards. Focus on your feelings. Think about how thrilling it will be when you step off the plane and explore your dream destination, or how gratifying it will be to finally pick up the keys and open the door to your new home.

Money is an emotional business and it’s impossible to completely separate your emotions from your finances – after all, we are only human. However, it is worth developing an understanding of how your emotions impact your finances – for worse or for better. Then you can address the things that are having a negative impact and harness those good vibes to achieve your dreams.

i https://www.pnc.com/insights/personal-finance/spend/emotional-spending.html

ii https://abcnews.go.com/Business/story

iii https://s3.amazonaws.com/kajabi-storefronts-production/sites/88071/themes/1463604/downloads/eDufrNCdSGyveaFGJXvf_Sentimental_Savings_Study_-_Journal_of_Financial_Planning_-_2019.pdf

Australia’s housing market: is the boom really over?

The reins were always going to be pulled on Australian property prices, it was just a matter of when. Recent CoreLogic data shows those boom days might be over, however a slowdown in national numbers or even individual city statistics doesn’t necessarily translate to falling values everywhere.ⁱ

A tale of multiple cities

This quarter marked a significant chapter for dwelling values in Australia’s two largest cities. Both Sydney and Melbourne hit their first quarter of negative territory since the extended lockdowns of 2020, according to CoreLogic’s June Home Value Index. Although quarterly housing values still increased 1.1 per cent at a national level, Sydney and Melbourne saw declines of -1.4 per cent and -0.8 per cent respectively.

It’s a different story though when we look around the country. The remaining capitals still recorded quarterly growth and the combined regions, where dwelling values outpaced the capitals for most of 2021, were still home to strong growth with a 3.6 per cent increase during the quarter.

The hot market cools

While markets outside of Sydney and Melbourne remained high, CoreLogic’s research director Tim Lawless warned their trends of growth were easing. According to the analyst, most capitals already moved through their peak periods either late last year, or early this year.

A snapshot of the annual growth trend in home values showed the days of fast-paced prices are behind us for this cycle. The national reading dropped from a recent peak of 22.2 per cent growth in the year to November 2021, to 14.1 per cent over the most recent 12-month period.

“Stretched housing affordability, higher fixed term mortgage rates, a rise in listing numbers across some cities and weaker consumer sentiment have been weighing on housing conditions over the past year. As the cash rate rises, variable mortgage rates will also trend higher, reducing borrowing capacity and impacting borrower serviceability assessments” Mr. Lawless noted in the CoreLogic index.

Interest rates on the rise

After spending 18 months at emergency lows, the Reserve Bank of Australia increased the official cash rate from 0.1 per cent to 0.35 per cent in May. This 0.25 per cent rise will inevitably put downward pressure on the pace of property price growth.

Economist Paul Ryan, of realestate.com.au’s data business PropTrack, said the market had clearly preempted the rate rise. “While this increase in rates was small, it signals the start of a series of interest rate rises before the end of 2022. This will weigh on housing price growth, which has clearly slowed in anticipation of these higher borrowing costs. The outlook for housing prices later in the year is one of a balance between higher mortgage rates and the higher income growth the RBA is looking to see before raising rates.” ⁱⁱ

City snapshots

Sydney

Australia’s most expensive city saw a -1.4 per cent quarterly change in the three months to May’s end, while the annual change remains well and truly in positive territory with a 10.3 per cent increase. Sydney’s 12-month dwelling median now sits at $1,120,836 million according to CoreLogic figures.

Melbourne

The Victorian capital experienced a subtle -0.8 per cent dip over the last quarter but remains 5.8 per cent up annually despite a troubled year of lengthy lockdowns and a significant exodus of people from the city to the regions. Melbourne’s median is now at $806,196.

Brisbane

Now the second most expensive city for property with a median dwelling value of $940,026 Canberra is still in a price growth environment. The nation’s capital has recorded a 2.2 per cent quarterly change and an 18.7 per cent annual increase.

Canberra

The nation’s capital saw a surge in the median dwelling value of 3.7 per cent to $906,529. In a 12-month period, rent in Canberra jumped 9.7 per cent (houses) and 6.8 per cent (units) while the gross rental yield was 3.8 per cent.

Perth

The West Australian capital’s dwelling price increased by 2.7 per cent over the quarter to a median of $555,538. During the year to May’s end, the annual increase for Perth’s property was 5.6 per cent.

Interest rates are on the rise, which means borrowing power has shifted for the first time in more than a decade. To get a better understanding of how market changes will impact your next property purchase, contact us today.

i CoreLogic’s June Home Value Index: corelogic.com.au

Note: all figures in the city snapshots are sourced from: CoreLogic’s national Home Value Index (June 2022)

ii https://www.realestate.com.au/news/housing-price-growth-stalls-with-rate-hikes-to-accelerate-the-slowdown