Aussie mortgage holders spared a Christmas interest rate rise

The Reserve Bank of Australia (RBA) has provided mortgage holders a Christmas time reprieve, electing to keep interest rates on hold at 4.35 per cent at today’s Board meeting.

Last month, the Board increased interest rates 25 basis points, noting inflation was returning to target slower than forecast.

But this time around, RBA Governor Michele Bullock said the Board had decided to hit pause to allow the previous hike to take full effect.

“Holding the cash rate steady at this meeting will allow time to assess the impact of the increases in interest rates on demand, inflation and the labour market,” she said.

But whether or not the cash rate is now at its peak will depend on a range of factors, including December’s inflation numbers, which are due at the end of January, just before the next RBA Board meeting at the start of February.

“There are still significant uncertainties around the outlook,” Ms Bullock said.

“While there have been encouraging signs on goods inflation abroad, services price inflation has remained persistent and the same could occur in Australia. 

“There also remains a high level of uncertainty around the outlook for the Chinese economy and the implications of the conflicts abroad.”

Ms Bullock said on Australian shores uncertainty remained regarding the lag in the effect of monetary policy and how firms pricing decisions and wages would respond to the slower economic growth, particularly at a time when the labour market remained tight.

“The outlook for household consumption also remains uncertain, with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income,” Ms Bullock said.

“Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks. 

“In making its decisions, the Board will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market. 

“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”

Geoff Lucas – The Agency

The Agency’s Managing Director and Chief Executive Officer Geoff Lucas said today’s interest rate hold was widely expected, but by no means spelt the end of interest rate rises.

“The decision was largely expected following last week’s encouraging CPI figure of 4.9 per cent, which followed 5.6 per cent and an expectation of 5.2 per cent,” he said.

“While it was positive news in the fight against inflation, it is far too early to draw conclusions of success. 

“With the board not meeting again until February 6 next year, where there will be no change for an extended period, which provides an opportunity for great stability in the property market.”

Bur Mr Lucas said there remained concerns that a small amount of tightening may still be required, with January’s CPI data to provide a crucial insight.

“The fight against inflation is not over as it remains well above the RBA’s target rate,” he said.

“Most commentators at the beginning of the year expected interest rate increases, and we have seen interest rates rise by 125 basis points. 

“At the same time many expected price falls and we saw a national increase of 8.3 per cent to date, according to Corelogic. 

“Many factors, including limited supply and continued demand fuelled by stronger than expected immigration have ensured a very tight residential market. 

“Added to this, and importantly, the unprecedented pandemic relief of $300 billion has not yet fully been exhausted, with a large component sitting in borrowers offset accounts. 

“This has sheltered many borrowers from the 13 interest rate increases and these balances will gradually be drawn down over the coming six to 12 months, which will negatively impact mortgage serviceability and property affordability.”

Mr Lucas said even though there was increased positive comments around the potential for interest rate cuts, he expected rates to remain higher for longer.

He said this would spell subdued price activity in the real estate market next year, with only minor gains expected in some areas and falls in others.

“Australia is made up of a number of different markets and whilst these expectations are at a national level, there will continue to be area-specific over and underperformance,” he said.

“After four years of unprecedented price volatility, we are entering a period of greater stability and a safer transactional environment for those both buying and selling real estate. 

“The top of the interest rate cycle and subsequent price stability should signal a return to the fundamentals whereby quality real estate in good quality areas will outperform.”

Mr Lucas said higher interest rates for longer would see an increase in investment properties being listed, with investors seeking higher cash returns.

“This will create an opportunity for more first home buyers entering the market place in 2024, especially as rental markets become more challenging,” he said.

“The prestige market should outperform being insulated from interest rates and benefitting from escalating international demand fuelled by the weak Australian dollar.” 

Ray Ellis – First National 

First National Real Estate CEO Ray Ellis said Australian’s confidence had been tested over the past 18 months, with 13 rate rises, and we are now reaching “the tipping point” where household budget can not cope with another rate rise.

“A rate rise now or early in the New Year will negatively impact buyers and investors decisions to purchase and, no doubt landlords, will be forced to pass on these increases to renters,” he said.

“The housing crisis is not going away and consumers still recognise that their only chance to ride these challenging times and maintain the value of their home is to purchase affordable quality and value properties in the right locations with strong transport and surrounding infrastructures.

“In some rental areas we are seeing renters moving back to mum and dad and increased interest in shared accommodation and room rental, which real estate agents have not seen since the early ‘60s.”

Nerida Conisbee – Ray White Group

Ray White Chief Economist Nerida Conisbee said further interest rate rises remained a possibility given inflation was dropping, but doing so at a leisurely pace.

“Inflation continued its painfully slow downward trajectory in October, resulting in rates remaining on hold in December,” she said.

“The most significant increase in the inflation basket continues to be housing, in particular rents. 

“While construction increases have slowed considerably, the lack of rental accommodation is driving up inflation. 

“Housing costs are now up 6.1 per cent over the year. 

“Food is another major driver of inflation, up 5.3 per cent. Automotive fuel is also causing problems, up 8.6 per cent. 

“Will we see another rate rise? Perhaps. Inflation is coming down but not quickly.”

Ms Consibee said market expectations of where interest rates will peak continue to fluctuate, but there are some encouraging signs from overseas. 

“In the US, inflation is now down to 3.2 per cent, while Canada sits at 3.1 per cent,” she said.

“Elsewhere, inflation is still too high but the gap between where central banks want it and where it sits is narrowing.”

Mathew Tiller – LJ Hooker

LJ Hooker Group Head of Research, Mathew Tiller said today’s Christmas interest rate reprieve signalled the start of what he believes will be a ‘wait and see’ approach from the RBA.

He said the central bank would assess the impact of November’s interest rate rise over the coming months and see what happens to spending levels. 

Mr Tiller said listings had increased recently but are tipped to taper off over the holidays before returning early in 2024.

“Solid and consistent price growth during the past 12 months means homeowners regardless of their circumstances are now more confident that they will achieve a good sales price,” Mr Tiller said. 

“So while there is a component of sellers who are doing it a little bit tough due to last month’s rate rise, not everyone is listing because they are struggling to pay their mortgage.

“We are also seeing a lot of general sellers in the market – these are families looking to upsize or downsize as well as retirees who are moving forward with their plans because they feel assured and know there are buyers out there ready to purchase.”

The latest data from the ABS showed inflation is falling following 13 interest rate rises by the RBA, since May 2022.

Mr Tiller said the market would begin to favour buyers as listing numbers increase, however, prices are expected to remain steady.  

Demand will be driven by strong population growth, low unemployment and a very tight rental market. 

In addition, there is an overall lack of new dwellings being built that could relieve the housing shortage. 

Investors are also adapting to rising interest rates resulting in those with highly leveraged multiple properties looking to reduce the size of their portfolio. 

At the same time, the tight rental market is encouraging cashed-up investors to purchase, attracted by high rental returns. 

Sellers who are prepared to go to market sooner rather than later could find some advantageous sales conditions over the summer break.  

“There are still buyers out there in the market and while auction clearance rates have softened a little, they remain above 60 per cent which is still a good number,” Mr Tiller said.

“There is an advantage to having your property on the market over the Christmas period because buyers have time, they are off work and can scroll through listing portals to see what is happening in their local market. 

“So, there is less competition and being the start of the year many buyers have renewed motivation.”

Eleanor Creagh – PropTrack

PropTrack Senior Economist Eleanor Creagh said today’s interest rate hold signalled the RBA was willing to pause interest rates momentarily, but another rise in February was not out of the question.

“Conditions are expected to continue to soften as the full impact of monetary tightening to date is yet to be felt and inflation is likely to continue moving lower as a result,” she said.

“The RBA has been clear that it has a low tolerance for allowing inflation to return to target more slowly than currently expected. 

“This means it’s likely the cash rate has peaked in this current tightening cycle, although should inflation data indicate inflation is returning to target at a slower pace than currently expected the risk of another lift in February 2024 remains.”

Ms Creagh said the PropTrack Home Price Index showed property prices had defied expectations this year and home values had remained resilient to higher interest rates.

That continued in November, which marked the eleventh consecutive month of national home price growth, meaning prices have grown every month of this year. 

“After falling 4.02 per cent from March 2022 to December 2022, national prices are now up 5.53 per cent from the low point recorded in December 2022,” Ms Creagh said.

“This brings them 1.29 per cent above their previous peak to a fresh record high.

“The decision by the Reserve Bank to hold the cash rate steady in December will maintain both buyer and seller confidence.” 

Ms Creagh said the outlook for the economy was weaker, but population growth was set to remain strong.

“Together with a shortage of new home builds and challenging conditions in the rental market, prices are expected to continue rising, though the pace of growth will continue to slow,” she said.

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Kylie Dulhunty

Kylie Dulhunty is the Editor at Elite Agent.