The Reserve Bank of Australia has ratcheted up the cash rate target by 0.5 percentage points to 2.35 per cent, its highest level since 2015.
Following its policy meeting on Tuesday, the RBA decided to increase the cash rate for the fifth consecutive month in a bid to bring inflationary pressures, surging at the fastest pace in about 30 years, under control.
In April, the cash rate was 0.1 per cent following a 32-year falling trend in rates from 17 per cent in 1989.
Since the initial 0.5 percentage point interest rate increase in May, Australia’s house prices have suffered the steepest drop in nearly 40 years, down by 3.5 per cent nationally.
Data from Corelogic showed house prices across the country dropped again by 1.6 per cent in August.
Sydney experienced the biggest fall with values declining 2.3 per cent, while Brisbane dropped 1.8 per cent, Melbourne dipped 1.2 per cent and Canberra and Hobart both fell 1.7 per cent. Adelaide and Perth had smaller falls of 0.1 per cent and 0.2 per cent respectively.
AMP Capital chief economist Shane Oliver told The Urban Developer that rapidly rising interest rates were expected to darken the property outlook further.
“The fall in home prices nationally from their highs reflects the impact of higher rates in dampening home buyer demand,” Oliver said.
“Further weakness is likely and top to bottom we expect home prices to fall 15 to 20 per cent which will likely mean some buyers will struggle and put their home on the market.”
“If the cash rate is raised to the 4 per cent level, the money market is assuming this would more than double household interest payments and push total mortgage repayments to record highs relative to incomes and likely drive a 30 per cent or so fall in prices.”
Oliver said banks had already sharply raised borrowing costs on new fixed-rate mortgages and tightened lending standards.
“Consumer confidence is down around recessionary levels reflecting worries about the cost of living and rate hikes and most housing indicators are falling sharply with home prices also falling,” Oliver said.
“And there is a bigger impact to come as those on fixed-rate loans see their rates reset to levels that are more than double what they are paying now. This suggests much slower economic growth ahead.”
Economists have disputed that the RBA is planning to lift rates as high as 3.9 per cent by next year following a series of smaller 0.25 percentage point increases over the summer months. Opinions vary on the peak rate and whether the central bank will start easing next year.
Commonwealth Bank is also forecasting a pause in the RBA’s tightening for “at least a few months” when the cash rate hits between 2.6 per cent and 2.85 per cent to see if inflation was starting to abate.
CBA economists said home borrowers had “barely felt” the first 175 basis points of tightening so far as there is an average three-month lag between the RBA’s move and the higher rate affecting variable mortgages.
ANZ research senior economist Felicity Emmett said the bank was expecting the RBA to lift the cash rate to 3.35 per cent by the end of 2022 which in turn would accelerate and broaden the housing downturn in coming months.
“This leads to an interesting conundrum for some first-home buyers and renters—house prices may be falling but many other living costs continue to rise sharply, including fuel, electricity and food prices,” Emmett said.
“These costs are being felt right across Australia but are particularly acute among renters. Non-discretionary inflation—the increase in the prices of household necessities—jumped to 7.6 per cent in the year to June.”
Economists are now expecting the recovery in home prices to be slower than seen in property downturns over the past 25 years due to very high home price-to-income ratios, household debt-to-income ratios and weakening investor demand.
Falling housing prices have led to a few bright spots in terms of housing affordability. For the first time in almost two years, the so-called deposit hurdle for new home buyers is falling in capital cities amid the downswing in home values.
The time needed to save a 20 per cent deposit on the median dwelling value has fallen by about three months in Sydney and Melbourne—to 13.7 years and 11.1 years respectively.
However, a median income household now needs 44 per cent of income to service repayments on a new mortgage for the median dwelling value, according to CoreLogic and the Australian National University.
The proportion is the highest level since mid-2011 and a notable jump from late 2020 when just 33 per cent of income was needed.
The unemployment rate, down to a 48-year low of 3.4 per cent in July, was helping households keep up with repayments. The savings rate, down recently from its Covid lockdown peak, was also higher than pre-pandemic levels.
