Another cash rate hike with more to come

The Reserve Bank of Australia has warned homeowners more interest rate rises will follow as they raised the official cash rate 50 basis points, to 1.35 per cent, at its monthly meeting today.

The rise, which will add $230 to monthly repayments on an $800,000 mortgage, is the third consecutive jump in as many months, with the RBA lifting the cash rate 1.25 per cent since May.

In his monetary statement, RBA Governor Philip Lowe said today’s rate rise was a further step in the withdrawal of the “extraordinary” support put in place to protect the economy during the pandemic.

“The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed,” he said.

“The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead. 

“The size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market. 

“The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”

Dr Lowe said inflation was high, both globally and in Australia, with worldwide issues such as Covid-related disruption to supply chains, the war in Ukraine and strong demand putting pressure on productive capacity. 

But he cautioned that domestic factors were also fuelling inflation, including strong demand, a tight labour market and capacity constraints in some areas.

“The floods are also affecting some prices,” Dr Lowe said.

Inflation is expected to peak later in 2022 before dropping and stabilising in the 2-3 per cent range in 2023.

“As global supply-side problems continue to ease and commodity prices stabilise, even if at a high level, inflation is expected to moderate,” Dr Lowe said.

“Higher interest rates will also help establish a more sustainable balance between the demand for and the supply of goods and services.”

Dr Lowe said the Australian economy had remained resilient, with the unemployment of 3.9 per cent in May the lowest in almost 50 years.

Underemployment has also dropped, and the RBA expects it and unemployment will decline further in the months ahead.

Dr Lowe said the bank would also be keeping a close eye on household spending, acknowledging that some people were feeling the pinch already.

“The recent spending data have been positive, although household budgets are under pressure from higher prices and higher interest rates,” he said.

“Housing prices have also declined in some markets over recent months after the large increases of recent years. 

“The household saving rate remains higher than it was before the pandemic and many households have built up large financial buffers and are benefiting from stronger income growth. 

“The Board will be paying close attention to these various influences on household spending as it assesses the appropriate setting of monetary policy.”

Geoff Lucas – The Agency

The Agency Chief Executive Officer Geoff Lucas said that in mentioning the pressure on household budgets the RBA had acknowledged there was “a bit of pain” there, but had also indicated today’s rate rise was “not the end of the cycle”.

Foreshadowing future rate rises would impact consumer sentiment and potentially cause Australians to curb their discretionary spending further, Mr Lucas said.

“Using that language sometimes does the work for you rather than the actual interest rate increase,” Mr Lucas said.

“Consumers will be saying it’s going to continue to get tighter and, when you speak to small businesses, they’re already seeing spending patterns change.”

Mr Lucas said the recent national wage increase of 5 per cent would put further pressure on small businesses.

“Not only are they finding it difficult to find staff, there have been these award increases and now their regular customers are reducing their expenditure,” he said.

“It’s a classic example of how people are starting to feel it.”

Mr Lucas said Australia could also look to the US to gauge potential economic conditions, with the US manufacturing index reduced for the first time in two years.

“That indicates a softening in economic conditions,” he said.

“That’s reinforced by the 10-year US treasury yields, which have reduced in the past two weeks from 3.5 per cent to 2.9 per cent.

“While there was a very aggressive outlook for interest rate increases in the US, we’re just starting to see early data that suggests that these increases, so far, are actually biting the economy. 

“And it’s possible that could also be seen here in Australia.”

Mr Lucas also reminded potential property buyers that while mortgage interest rates were rising, so too were savings account interest rates.

“The people that have cash balances, the people that are saving for a home, are actually earning interest on their savings now,” he said.

Nigel O’Neil – Barry Plant Group

Speaking from the Barry Plant Leadership Conference in Darwin, Chief Executive Officer Nigel O’Neil said the RBA’s 50 basis point cash rate increase was a ‘steady as she goes’ approach to balancing the economy.

Mr O’Neil noted the challenge was to curb inflation without sending the economy into a recession, and it was likely the rises would continue until the cash rate reached 2.5 per cent.

At that point, Mr O’Neil predicted the RBA might pause further interest rate rises to gauge the effect the increases were having.

But he noted it may not be enough, foreshadowing Australia could well dip into a shallow recession.

In the meantime, Mr O’Neil said the latest interest rate hike had already been factored in by many, including the big banks who had now increased their fixed rates.

“It was unheard of to see lender interest rates that started with a 2 or a 3, so many people would have factored in that this could not last forever,” he said.

“And the reality is even if rates were to hit 6 per cent, that’s not a high interest rate.”

Mr O’Neil continued many of the reasons cited by the RBA for today’s rise were known and understood.

“The Ukraine, supply shortages and inflation, these were all known,” he said.

“But the RBA didn’t raise the cash rate by 75 basis or 25 basis points, they went for 50 basis points as part of a steady as she goes approach.”

Manos Findikakis – Agents’Agency

Agents’Agency Chief Executive Officer Manos Findikakis said the number of transactions in the property market had already reduced but he expected the dip to be relatively short-lived despite anticipating more interest rate rises to come.

“I think by the end of the year we’re going to be at pre-Covid interest rate levels,” he said.

“I think we are going to see a repeat of 2018-2019 when the market really slowed down, with the pressure they’re putting on.

“Listings are coming on strong but we’re seeing the volumes of transactions reduced, which is an indication of the tightening in the market and in confidence.”

Mr Findikakis said over the next two to three months he expected potential buyers and sellers to take stock of their situations and re-evaluate, but he tipped a solid October and November, as well as a buoyant February and March next year.

“I think that by the time October and November come around people will have adjusted to the market and that this is the new norm,” he said.

Unlike other dips in the property market, Mr Findikakis said this time there was a lot more job security with low unemployment rates.

“The labour market is so tight and there’s pressure on wage increases so I still think there’s plenty of opportunity for people who understand the numbers,” he said.

Winter is also traditionally a quieter selling period, despite that not being the case over the past two years, and Mr Findikakis said it’s the ideal time for agents to work their database, prospect, and build their pipeline of upcoming listings ahead of spring.

“Work now to build that pipeline for a strong October and November spring selling period and then prepare for another good February and March selling period because everyone will have adjusted by then,” he said.

“And then they will still realise that interest rates under 5 per cent are still very affordable.”

Andrew Cocks – Richardson & Wrench

Richardson & Wrench Managing Director Andrew Cocks described today’s interest rate rise as inevitable with the only question being how much.

“A hundred per cent of forecasters predicted a 0.25 per cent increase with the majority correctly picking that the RBA would settle on a 0.5 per cent jump,” he noted.

“This latest increase continues the move to a normalisation of interest rates where we will see monetary settings reflect more typical conditions. 

“But the push to aggressively raise interest rates is being driven by the very high inflation that is currently being experienced across all areas, which has jumped much higher and more quickly than most forecasters had predicted. 

“The unpredictable and volatile movements in most markets are a hallmark of the post-Covid recovery and when you throw in Russia’s invasion of Ukraine to further destabilise the world economies, these effects are super-charged.”

Mr Cocks noted there were also now growing voices warning of a global recession with all of the associated impacts as early as the end of 2022.

“And with all of the inflationary pain that is being felt, the fact that Australia is faring better than many other countries is often overlooked,” he said.  

“If this comes to pass, the associated rising unemployment and a slowdown in demand will result in further pressure on inflation, however the combination of so many abnormal influences on our markets means that we will continue to navigate unchartered territory for some time yet.”

Mr Cocks said there was also uncertainty about the impact that all of this adjustment would have on housing markets. 

“It’s clear that most real estate values across the country were pushed way too high into unsustainable territory over the last couple of years and there is now a lot of commentary on the extent and rate of adjustment that will occur.

“Again, there are so many conflicting factors at play.”

These include:

  • Low rental vacancy rates, resulting in climbing rents which is improving rental returns.
  • Skilled worker and student migration tipped to be pushed much higher and approaching 200,000 people over the next year.
  • Reduced new residential construction commencements (particularly of medium and high density residential) due to high land and construction costs.
  • Historically high level of household savings with many Australians building a very healthy saving buffer during the pandemic.
  • Lending capacity being reduced due to the dual impacts of higher interest rates and increased cost of living.
  • Lower new listings coming onto the market.

“All of these factors will mean that we’re in for a bumpy ride over the next few years,” Mr Cocks said.

“But one thing is pretty clear – with quality real estate across the country, diverse and strong job markets, modern infrastructure and social frameworks, significant natural resources and a very healthy and educated population, it’s going to be much better navigating this turbulence in Australia than most other parts of the world.”

Mathew Tiller – LJ Hooker

LJ Hooker Group Head of Research Mathew Tiller said low unemployment and ongoing government incentives would keep demand for property at a healthy level even with today’s rate rise.

He said the RBA’s decision to move the cash rate for the third consecutive month was not unexpected with inflation a continuing concern for central banks globally. 

While early signs indicate domestic demand pressures on inflation will ease, it is yet to bring short-term relief. 

Mr Tiller said household budgets were strained by the high cost of living and current flooding and wet weather may cause further price pressures for locally grown food. 

“Cost of living pressures combined with rising interest rates have seen buyer demand begin to soften from the record highs experienced last year,” he said. 

“Overall, we are seeing dwelling values begin to fall, however, each state and territory tells its own story. 

“Prices are falling in Sydney and Melbourne where supply is rising above demand resulting in a decline in values. 

“In Adelaide, Perth, and Brisbane we continue to see very low amounts of properties on the market for sale and values have continued to climb.”

Mr Tiller said while interest rate increases had made some buyers hesitant, there was still pent-up demand from those who missed out on securing a property over the past two-years. 

With the competitive heat dissipating in Sydney and Melbourne, these buyers are taking their time to look around and make sure the property will meet their needs.

“Demand will continue to slowly soften, however, low unemployment rates plus ongoing government incentives – including those for first home buyers – will ensure a healthy demand remains in the market,” Mr Tiller said. 

“Such incentives combined with employment security will help put a floor under the buyer demand and reduces any possibility of a sharp market downturn.”

Mr Tiller said rate rises would see buyers reassess their borrowing capacity and days on market may rise as they become more selective in their house hunting.

He believes house hunters will prefer new, renovated and move-in ready properties, especially as the NSW floods will mean builders and tradespeople are in high demand.

Eleanor Creagh – PropTrack

PropTrack Senior Economist Eleanor Creagh said today’s 50 basis point increase reflected the central bank’s pledge to do whatever is necessary to rein in inflation.

“Recent commentary from the Reserve Bank governor is consistent with a front-loaded tightening cycle, with the governor reiterating the boards’ determination to overcome the challenge of high inflation and do “what is necessary” to rein in inflation pressures,” she said.

“A consecutive 50bp hike at today’s meeting has reaffirmed this determination to ‘get ahead of the curve’, hiking more aggressively in a bid to tame inflation.”

Ms Creagh noted property price growth had slowed Australia-wide and prices had quickly begun to fall in some regions as a result of the recent increases. 

“Housing affordability will continue to decline as repayments become more expensive with rising interest rates,” she predicted. 

“The PropTrack Home Price Index shows national prices continued to fall in June and we expect a further downturn in prices in the period ahead.

“However, it is important to put price falls in context. 

“We have seen extraordinary growth in housing prices over the last two years, with home prices up 34 per cent on pre-pandemic levels. Further price falls would still leave prices above pre-pandemic levels.

“Mortgage rates have moved higher, and many buyers can no longer borrow the same amount as this time last year. 

“In addition, as interest rates are expected to continue to rise, prospective buyers not only face higher borrowing costs but have a lot more uncertainty around future borrowing costs than those over the past two years. 

“This is being reflected in the housing market – buyer demand is moderating, auction volumes and clearance rates have fallen and sales volumes have also slipped, along with falling prices.”

Describing the RBAs back-to-back interest rate hikes as ‘rapid policy tightening’, Ms Creagh said the risk of high household debt and weak sentiment could be offset by the tight labour market, promoting a degree of confidence and job security and hopefully, in turn, stronger wages growth. 

“In addition, households are sitting on large savings buffers,” she said.

“For many homeowners, substantial home equity has been accumulated after the significant rise in home prices over the last two years, and some have taken advantage of falling interest rates to pay down debt quicker. 

“The RBA estimate the typical owner-occupier borrower is around two years ahead on their mortgage.

“Market pricing as of yesterday’s close implies a cash rate of 3 per cent by December this year. Though the RBA have signaled a desire to ‘get ahead of the curve’, it’s likely the cash rate ends the year closer to 2 per cent than 3 per cent.”

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Kylie Dulhunty

Kylie Dulhunty is the Editor at Elite Agent.

Cassandra Charlesworth

Cassandra Charlesworth is a features writer for Elite Agent Magazine with over 15 years’ journalism experience in metropolitan and regional newsrooms. She has a specialist interest in real estate, tech disruption and a good old-fashioned “yarn”.