The Reserve Bank of Australia has cut the official cash rate for the second consecutive month.

Australian shares hit a six month low at close of business yesterday, wiping approximately $23 billion from the share market.

The share market drop, teamed with the recent drop in national house prices, forced the Reserve Bank to cut the cash rate 25 basis points to 3.50 per cent.

“ Our latest index data showed capital city home values fell by 1.4 per cent over the month of May which is a factor the Reserve Bank would have been conscious of when deliberating their interest rate setting,” said RP Data’s national research director Tim Lawless.

Such a significant fall over a single month was unexpected considering the cash rate was slashed by 50 basis points in the same month. Not only did home values fall further in May, but we also saw consumer sentiment remain fairly steady suggesting the May rate cut has had little effect in stimulating consumer confidence and spending. The rate cut today will provide a further boost to housing affordability, which the RBA has recently suggested is back around levels not seen since 2002.

The big question now is how much of the rate cut will be passed on by the banks privately and whether this will be enough to provide a shot in the arm for the housing market.

A 0.5 per cent cut was anticipated, however until we know more about the fallout from the European debt crisis, a 25 basis point cut now, with another 25 points in July, is probably the most sensible course of action.

The move by the RBA to cut the official cash rate to 3.5 per cent will provide much needed respite for owner-occupiers as lower interest rates will also help offset the impact of rising energy costs.

With share markets around the world down by between 10 per cent and 20 per cent from their 2012 peaks, lower interest rates will help encourage more investors to take the plunge into a real estate asset, especially with vacancy rates across Australia near all-time lows.