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Cash rate hits highest point in a decade

The cash rate is now at its highest level since 2012, with the Reserve Bank of Australia (RBA) using its last monetary policy meeting of 2022 to lift the cash rate 25 basis points.

The cash rate now sits at 3.10 per cent, following the largest tightening cycle since the early 2000s, at 300 basis points.

In his statement RBA Governor Philip Lowe stressed, “inflation in Australia is too high, at 6.9 per cent over the year to October”.

He also doubled-down on the bank’s prediction that inflation would rise further.

“A further increase in inflation is expected over the months ahead, with inflation forecast to peak at around eight per cent over the year to the December quarter,” Dr Lowe said.

“Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand. 

“Medium-term inflation expectations remain well anchored, and it is important that this remains the case. 

“The Bank’s central forecast is for CPI inflation to decline over the next couple of years to be a little above 3 per cent over 2024.”

But Dr Lowe also recognised that monetary policy operated “with a lag” and that the full impact of earlier interest rate rises were yet to be felt in mortgage payments.

Yet he also warned that high inflation “damages our economy and makes life more difficult for people”.

“The Board’s priority is to re-establish low inflation and return inflation to the 2–3 per cent range over time,” Dr Lowe said.

Dr Lowe said household spending was expected to slow, although the timing and extent of the slowdown was uncertain.

“Another source of uncertainty is the outlook for the global economy, which has deteriorated,” Dr Lowe said.

“The Board is seeking to keep the economy on an even keel as it returns inflation to target, but these uncertainties mean that there are a range of potential scenarios. 

“The path to achieving the needed decline in inflation and achieving a soft landing for the economy remains a narrow one.”

So far, the Australian economy has fared well, continuing to grow solidly. But Dr Lowe said it was expected to moderate over the year ahead as the global economy slowed further, the bounce-back in spending on services runs its course, and growth in household consumption slows due to tighter financial conditions. 

“The Bank’s central forecast is for growth of around 1.5 per cent in 2023 and 2024,” he said.

He said the labour market also remained tight, with unemployment falling to 3.4 per cent in October, the lowest rate since 1974.

Employment growth has also slowed as spare capacity in the labour market is absorbed. 

Wages growth continued to pick up from the low rates of recent years and a further pick-up is expected due to the tight labour market and higher inflation. 

“Given the importance of avoiding a prices-wages spiral, the Board will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms in the period ahead,” Dr Lowe said.

Dr Lowe also foreshadowed further interest rate rises in 2023 and said the Board would closely monitor the global economy, household spending and wage and price-setting behaviour. 

“The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market,” he said.

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

Geoff Lucas – The Agency

The Agency Chief Executive Officer Geoff Lucas said he expected today’s 25 basis point increase in the cash rate and he remained at the lower end of expectations of where the terminal rate would finish up, tipping between 3.10 per cent and 3.35 per cent.

“Today’s rate decision, being early in December, sees the next RBA meeting almost two months away,” he said.

“As a result, the RBA has more time to see the full impact of rate increases to date on consumer demand and sentiment and will have a host of additional economic data before the next decision in February 2023.”

Mr Lucas said the most recent inflation figures were below expectations and further reduction in consumer demand was likely to increase that trend. 

“We expect an improvement in sentiment once the RBA demonstrates they are finished with the current tightening cycle – and a pause in February 2023 is likely to deliver this,” he said. 

“That turn in sentiment will drive buyer activity, which will however be met with increased supply of homes coming to market during 2023 as people progressively begin to roll off their fixed rates. 

“Many people will be rolling off from sub two per cent rates to circa six per cent. We may also see an increase in discretionary property hitting the market.”

Mr Lucas said despite some commentary on the potential for price rebound, he said he expected further price softness at the start of next year, followed by stabilisation through the middle of the year and an extended period of steady prices after that.

“These are conditions of a healthy transactional market in which buyers and sellers can transact with greater confidence,” he said.

Andrew Cocks – Richardson & Wrench

Richardson & Wrench Managing Director Andrew Cocks said today’s cash rate rise continued to return interest rates to more normal settings and most market observers tipped it would peak at 3.6 per cent, which would mean two further rate rises in early 2023.

“If we end up with a cash rate stabilising at this level, we’ll be sitting at a cash rate that is higher than it has been for a decade, however still well below the long-term average over the last 25 years and we’re then likely to have a period of stability before we see the next move which is likely to be down, assuming that the negative forces that are being applied to the economy start to take hold,” he said.

Mr Cocks said even if economists got things slightly wrong, as long as rates didn’t rise too far above 3.6 per cent, the Australian economy was well positioned to move through the post-Covid adjustment “without too many scars”.

“The real estate market has been experiencing a level of adjustment for some time now and in some ways, the Australian property market has been moving with some level of independence from the cash rate cycle,” he said.

“The overshoot that occurred during the Covid-induced boom is gradually being pared back to meet the long-term yield curve however with a level of stabilisation occurring in many segments of the Australian property market.”

Mr Cocks said the Sydney and Melbourne markets had some of the highest and earliest peaks and had been among the first to see declines too.

He said vendors were generally more realistic in their expectations and with the likely end of the current rate rise cycle in early 2023, buyers were likely to be able to actively look at real estate with a much clearer idea on their budgets and loan options.

“Provided that Australia can continue to maintain strong employment, which is currently sitting at 3.4 per cent, and with the big push to increase the migration rate just starting to build momentum, it’s likely that the demand for housing, both for purchase and rent, will see most real estate markets in Australia stabilise and experience some modest growth in both volumes and prices over the course of 2023 and into 2024,” Mr Cocks said.

Manos Findikakis – Agents’Agency

Agents’Agency Chief Executive Officer Manos Findikakis said he expected the .25 per cent cash rate increase as a measure to ensure there is no overspending in the Christmas season.

But so far, he said the interest rate rises had had the desired effect, with consumers putting spending on hold, and this was represented with decreased sales volumes.

“My gut feel is that we are at the bottom of the property cycle, and I think December and January will be challenging as volumes will be low,” Mr Findikakis said.

“I don’t feel pricing of properties can go any lower. 

“Those that have been under mortgage stress have listened to the market and subsequently sold.”

Mr Findikakis tipped prices would plateau over the next 12 to 18 months before seeing any increases.

“My guesstimate is that we won’t see any further falls,” he said.

“But as with any market, well presented, well promoted and well priced properties will always outperform others that don’t invest in presentation, promotion and, of course, enter the market overpriced. 

“Overpricing is the killer in this current market for sellers wanting a premium price.”

Mike McCarthy – The Barry Plant Group

Barry Plant Group Chief Executive Officer Mike McCarthy said while today’s interest rate rise was expected, it was also “disappointing”.

He said several recent figures had pointed to the fact inflation may have peaked, and he feared the RBA may risk “over-correcting”.

“Retail spending fell 0.2 per cent month-on-month in October, and while spending is expected to have increased in November because of the big sales and people shopping early for Christmas because of anticipated stock shortages, that fall in October shows people are beginning to tighten their belts as a result of the previous interest rate rises,” he said.

“In addition, the CPI coming in at 6.9 per cent for the 12 months to the end of October, rather than the anticipated RBA forecast of eight per cent, is further indication of a slowing economy.  

“The RBA was, in my opinion, too slow to act initially in increasing interest rates when it was clear to most of us in the business community that there were already significant supply chain and labour issues that would add significantly to inflationary pressures. 

“My concern now is that the RBA will again be too slow to react to a slowing economy and will over-correct which will result in a more challenging interest rate environment than may be necessary.”

Thomas McGlynn – BresicWhitney

BresicWhitney Chief Executive Officer Thomas McGlynn said cash rate rises had been a hallmark of the property market in 2022 and had forced owners, sellers and buyers to take a longer-term view of home ownership and their aspirations, regardless of whether they were to enter the market, upsize or invest. 

“It’s been very challenging and the latest rate rise today confirms that pressure won’t be eased any time soon,” Mr McGlynn said.

“Those coming off fixed rates in 2023 are set to feel a wave of pressure that those on variable rates have, for lack of a better word, the fortune of being fed in increments.”

Mr McGlynn said the upside was that vendors and buyers had acclimatised to the economic environment and were now “on the same page”.

“This includes not only with regards to pricing expectations, but the willingness to participate in post-auction and off-market negotiations,” Mr McGlynn said.

“Looking into 2023, the overwhelming majority of people selling or buying will have a need to do so, and are therefore willing to meet these changing conditions and shift their mindset for the longer-term.”

Mathew Tiller – LJ Hooker

LJ Hooker Group Head of Research Mathew Tiller said the eighth consecutive rate rise was unlikely to surprise mortgage holders, who have been budgeting for the increase.

He said the latest move from the RBA came at a time when the rate of price drops in both 

metropolitan and regional markets continued to slow down. 

Just three months ago, Sydney property values had declined 2.3 per cent but more recently had fallen 1.3 per cent. 

In Perth, property prices were stable from October to November, while values increased by 0.2 per cent in Perth, latest CoreLogic data shows. 

Mr Tiller said listings remained tight, with the expectation that the market would bottom out soon. 

He said the number of homes for sale was down 30 per cent from this time last year, while the number of transactions has also declined 23 per cent. 

“These figures show us that vendors are being more cautious than buyers in the current market,” Mr Tiller said. 

“There is always a base level of those who have to sell whether it is due to personal reasons but we are also seeing some people list their property in order to downsize their mortgage. 

“These are people who have purchased prior to the pandemic and with equity in their property  – they are able to reduce repayments by moving to somewhere more affordable.” 

Mr Tiller said early signs showed higher interest rates had impacted the economy and inflation may have peaked.  

First-home buyer activity in NSW has picked up in recent weeks with the ability to defer stamp duty; investors are also back, however, they are constrained by the serviceability of loans and how much they can borrow. 

Mr Tiller said the RBA’s current cycle of cash rate increases may finish during the first quarter of 2023. 

This will see buyers who have been sitting on the sidelines jump into the market before any upswing in property prices.  

Those considering selling should start preparing their homes over the summer break and importantly have their home appraised. 

“It is not one homogeneous market in Australia, there are a lot of individual markets and every suburb performs differently – vendors need an understanding of what is happening in their particular area,” Mr Tiller said.  

“The best results are being achieved for homes in a good location, priced well and well-marketed. Look at what can be done to make your property more appealing to buyers and seek advice from the experts.” 

Eleanor Creagh – PropTrack

PropTrack Senior Economist Eleanor Creagh said today’s rise lifted the cash rate to its highest level since 2012.

“The fastest rise to the cash rate since the 1990s has quickly rebalanced the housing market from last year’s extreme growth levels, with prices falling in most parts of the country,” she said.

“Prices nationally are now sitting 3.81 per cent below their March peak after falling for the eighth month in a row amid headwinds from monetary tightening. 

“The most expensive markets of Sydney and Melbourne are leading the price declines. In Sydney, prices are down more than six per cent from peak and below levels recorded in November last year.”

Ms Creagh said with more rate rises on the horizon, borrowing costs would continue to increase and maximum borrowing capabilities would reduce, shrinking buyers’ budgets.

“Now the cash rate is sitting at 3.10 per cent after a substantial 300 basis points of tightening to date, maximum borrowing capacities have dropped by more than 20 per cent,” she said.

“The significant reduction in borrowing capacities implies further price falls.

“It will take time for higher interest rates to fully affect home prices, so prices are likely to continue to fall as interest rates continue to rise.”

However, Ms Creagh said if rates peaked next year, price declines would likely ease and values would stabilise.

“The downward pressure from rate rises will be countered to a degree by positive demand effects that stem from tight rental markets and rental price pressures, rebounding foreign migration, stronger wages growth, and over the long run, housing supply pressures,” she said.

Eliza Owen- CoreLogic

CoreLogic Head of Research Eliza Owen said at 3.1 per cent, the cash rate is the highest target adopted in 10 years. 

She noted the RBA was playing a delicate balancing act, with some indicators showing inflationary pressures were easing, while others showing it was still to early for a pause in the rate tightening cycle.

“There are early signs of a slight shift in the Australian economy, with further slowdowns expected as monetary policy permeates spending decisions,” she said. 

“Though modest, retail sales declined through October (the first monthly decline in 2022), falling 0.2 per cent. 

“Commodity prices have continued to ease, as have supply chain pressures. New dwelling approvals continued to trend lower over October, and although rental markets remain very tight, the rate of growth in rental values has started to ease slightly in some markets. 

“Quarterly growth in capital city rents peaked at 3.1 per cent in July, and has since eased to 2.5 per cent in the three months to November.”

But Ms Creagh said the September quarter ABS business indicators data, released this week, reflected a 2.9 per cent increase in wages and salaries, a growth rate not seen since 2007. 

“In October, labour force data showed continued growth in the number of people employed, and the unemployment rate fell 0.1 percentage points to 3.4 per cent,” she said.

The impact of recent rate rises on housing is flowing through to lower volumes of new mortgage finance secured, Ms Creagh said.

“From May through to October of this year, the monthly value of secured finance declined 17.9 per cent, annual sales volumes have trended 13.3 per cent lower compared to this time last year and consumer sentiment through November also dropped a notable 6.9 per cent,” she said.

“A lift in the cash rate of 300 basis points is noteworthy, because of the 300 basis point buffer on home loan serviceability assessment introduced by APRA in October last year. 

“New variable home loan rates for owner occupiers increased from a low of 2.41 per cent in April 2022, to 4.58 per cent in October. 

“Assuming the November and December increases to the cash rate are passed on in full, this could take average new variable rates to 5.08 per cent. 

“For those rolling off of low fixed-term rates, an average variable rate of 5.08 per cent may create a ‘sticker shock’, noting average fixed-term rates of three years or less bottomed out at 1.95 per cent for owner-occupiers.

“At 3.1 per cent, the cash rate has now entered the lower bound of major bank forecasts for a peak in the cash rate, with forecasts made in October ranging from 3.1 per cent to 3.85 per cent. 

“The higher rate environment will test housing market conditions in 2023, when the majority of outstanding fixed-term mortgages are expected to expire.”

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Kylie Dulhunty

Kylie Dulhunty is the Deputy Editor at Elite Agent.