The effect of the Australian dollar on the property market

It seems the eyes of the entire country are on two things – the property market, and the Aussie dollar. As can be expected, there is a significant interaction between the two major financial indicators, and lots of speculation on which direction each will take as the financial year continues.

Currency and cash rates

Over the past month the Australian dollar has fallen to a low not seen since the beginning of February this year. Whichever way the currency moves, there are always some industries that benefit and some that don’t, so a change in the currency is not going to have a blanket negative or positive effect on all Australian industries. The economic effect of currency fluctuations can only be truly considered within the framework of another factor, such as a specific industry or commodity. By considering all industries and their contributions to employment and GDP, the effect of the dollar on the nation can be understood.

NAB forecasts the Australian dollar at 0.88 against the United States dollar for the end of 2014 – not far removed from the current rate. Forecasts for the end of 2015 are at 0.82.

Another financial tracker over which there has been a lot of speculation in recent months has been the cash rate, and the Reserve Bank of Australia’s (RBA) decision to keep it at 2.5 per cent. Many industry watchers foresee the low rate continuing for another year, much to the delight of homeowners and those looking for property for sale across the country.

Property market reaction

The question now is, how does the property industry react to these developments? The effect of the Aussie dollar at this point on industry is undetermined. SQM Research managing director Louis Christopher believes that should the Australian dollar fall, the RBA may respond by increasing the cash rate for the first time in over a year, which in turn could potentially cap house prices. However, most people view a falling Aussie dollar as producing upward pressure on property – especially in tourism areas.

In its recent Financial Stability Review, the RBA indicated it would consult with the Australian Prudential Regulation Authority and other members of the Council of Financial Regulators on the best way to balance the market between investors and owner-occupiers. The inclusion of APRA and the CFR suggests that any moves going forward are unlikely to include raising the cash rate in the near future – as this is solely within the RBA’s domain.

With foreign investors keeping interest in the new building sector high, construction levels are providing a massive stimulus to the economy and jobs market. The ongoing low cash rate also ensures ongoing investor interest in residential real estate. The Real Estate Institute of Australia considers this a boon to the economy, especially in a market where undersupply is a major issue.