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Cash rate rises for the fifth month in a row

The Reserve Bank of Australia (RBA) lifted the cash rate 50 basis points today and at the same time forewarned homeowners further increases were coming.

The cash rate now sits at 2.35 per cent, following the fifth consecutive monthly increase, as the central bank looks to curb the highest inflation in Australia since the early 1990s.

RBA Governor Dr Philip Lowe said the Board was committed to returning inflation to the 2-3 per cent target over time.

“It is seeking to do this while keeping the economy on an even keel,” he said.

“The path to achieving this balance is a narrow one and clouded in uncertainty, not least because of global developments.”

Dr Lowe said the Board expected to lift rates further in the months ahead but advised there was no “pre-set path”, and the size and timing of future interest rate rises would be guided by inflation, unemployment, wages and consumer spending data and projections.

He said the Australian economy continued to grow solidly, while the labour market remained tight, with many industries having trouble hiring workers.

“The unemployment rate declined further in July to 3.4 per cent, the lowest rate in almost 50 years,” Dr Lowe said.

“Job vacancies and job ads are both at very high levels, suggesting a further decline in the unemployment rate over the months ahead. 

“Beyond that, some increase in the unemployment rate is expected as economic growth slows.”

Wages growth has also risen and in some pockets labour costs have increased quickly.

Dr Lowe said the Board would keep a close eye on the evolution of those labour costs, along with price-setting behaviours, as we moved closer to the end of the year.

Household spending will be another key area the Board analyses, with Dr Lowe labelling it “an important source of uncertainty”.

“Higher inflation and higher interest rates are putting pressure on household budgets, with the full effects of higher interest rates yet to be felt in mortgage payments,” he said.

“Consumer confidence has also fallen and housing prices are declining in most markets after the earlier large increases. 

“Working in the other direction, people are finding jobs, gaining more hours of work and receiving higher wages. 

“Many households have also built up large financial buffers and the saving rate remains higher than it was before the pandemic. 

“The Board will be paying close attention to how these various factors balance out as it assesses the appropriate setting of monetary policy.”

The RBA predicted inflation would peak later this year before sliding back towards the 2-3 per cent range as global supply-side problems reduced and the impact of rising interest rates flowed through.

“The Bank’s central forecast is for CPI inflation to be around 7.75 per cent over 2022, a little above 4 per cent over 2023 and around 3 per cent over 2024,” Dr Lowe said.

Nigel O’Neil – Barry Plant Group

Barry Plant Chief Executive Officer Nigel O’Neil noted today’s cash rate hike indicated the Reserve Bank was continuing to pull hard on the reins of runaway inflation, but he predicted they may ease up in the months ahead.

“We might see 0.25 per cent increase going forward after a 2.25 per cent increase in the past five months,” he stated.

He also reflected the balance between quickly curbing inflation and avoiding a recession remained a fine line to tread, particularly at a time when unemployment was at an all-time low.

Mr O’Neil explained on one hand the RBA was trying to curb inflation by easing household spending. 

Traditionally this is achieved because higher interest rates impact the household budget due to increased mortgage costs.

In the process increased interest rates also impact house prices, which reduces the feeling of ‘cashed up’ equity that people have in their homes and further reduces their confidence in spending. 

In a typical scenario where unemployment is at 4.5 to 5 per cent, this strategy often proves effective.

But Mr O’Neil noted with the unemployment rate at its lowest level in half a century and wages starting to increase, that balance was proving hard to achieve.

Meanwhile, he said part of the problem was a lag effect, with many households unlikely to feel the impact of interest rate rises until months afterwards.

As for how that’s impacting the property market, he said it was having little effect on investors who are starting to re-emerge due to a low vacancy rate and high rental yields.

The core segment becoming more cautious is upgraders and downsizers, who now have less inclination to move, he noted.

He also said the RBA’s approach was far different to the US Federal Reserve who were aggressively tackling inflation of around 9 per cent.

“The US is going hard, curbing inflation first and then fixing the economy,” he said.

“Australia’s a bit more balanced and not necessarily in a position to do that.”  

Geoff Lucas – The Agency

The Agency CEO Geoff Lucas said the successive interest rate rises had affected consumer sentiment and impacted discretionary spending patterns.

“The CBA has noted that current consumer sentiment is at a level normally associated with recession, or negative economic shock,” he said.

“While the media has been talking about consumer demand and retail spending figures remaining robust, when you break that down and look at retail spending for goods and retail spending for services, you see that in the most recent couple of months, consumer spending on services has deteriorated.”

Mr Lucas said services were more discretionary than goods and this was likely a better lead indicator of consumer demand.

He said today’s 50 basis point cash rate increase would mean aggregate spending would start to be affected.

“The CBA has also made the point that the average CBA customer takes, on average, three months for the cash flow impact of a rate rise to take effect,” Mr Lucas said.

“In any data to date, they’ve only had the impact of one 25 basis point increase, so they expect, and I concur, that consumer spending will drastically reduce in coming months.”

Mr Lucas said other CBA data showed the majority of fixed rate home loans would not expire until December 2023, which is why he believes the terminal rate is lower than what a lot of the financial markets are forecasting.

“CBA, for example, believes the terminal rate, and their base case, is 2.6 per cent, which I subscribe to,” he said.

“It’s currently 2.35 per cent and it’s highly likely to be another 25 basis points and then it looks like they (the RBA) will hold and assess.

“And by then the data is starting to indicate that will then show reduction in demand, reduction in inflationary pressure and therefore the case for holding over Christmas and New Year.”

Mr Lucas said there was potential for rate cuts in 2023 to avoid recession.

In terms of property prices, he said there would be further reductions and buyers remained cautious, but that was a good environment to assess purchases in.

In particular, Mr Lucas said investors were returning to the market as yields were rising and this was evidenced by an uptick in investor lending.

“That augurs well for the investment market in coming months because rents are going up, prices are softer and yields are going to be improving,” he said.

Andrew Cocks – Richardson & Wrench

Richardson & Wrench managing director Andrew Cocks noted the markets had already factored in a 50 point rate rise, so today’s RBA announcement surprised no-one. 

“All of the major economic indicators continue to track within the range of expectations,” he said.

“Unemployment remains very low, household cash reserves are still high, housing loan rates are still well below historic averages, inflation continues to be well above long-term averages but there are signs of moderation and consumer spending continues to be solid despite higher inflation and increasing interest rates.”

Mr Cocks said as a result, the real estate market would continue the same trend that has been observed over the last few months.

“Tightening rental markets with corresponding upward pressure on rents are consistent across most major markets, sales prices are softening with a corresponding reduction in new listing volumes which was expected given the over-reach of most markets during the pandemic,” he reflected. 

“We’re also seeing some signs of the return of city-dwellers from their regional sabbatical although the size of the long-term rebound remains unclear.

“It would be a significant long-term benefit to the country if the pandemic resulted in long-term population growth in regional Australia.”

Mr Cocks also noted a major announcement over the last week that skilled migration levels will be boosted to almost 200,000 per year for the next few years should signal long term benefits to the real estate industry.

“Restarting large scale migration will take time, and although we’ve started to see arrival numbers starting to pick up, there is still a long way to go,” he said.

“2023 will see the start of more significant people movement into the country, particularly as airlines are able to increase their international capacities above the current low international flight arrival numbers.

“This will coincide with the RBA ending the interest rate normalisation which is likely to support and sustain an already strong rental market as well as putting the brakes on property price reductions.

“Once the markets are confident that interest rates have stabilised, it’s likely that both sellers and buyers will move back into the market in greater numbers, which will be good news for everyone with an interest in real estate.

“With three more RBA meetings before Christmas, there’s a real opportunity for our central bank to move our markets back to more normal settings before we get too far into 2023.”

Thomas McGlynn – BresicWhitney

BresicWhitney CEO Thomas McGlynn said today’s rate rise was not unexpected, but that didn’t mean it wouldn’t impact the property market.

“While the market is aware of the RBA’s pathway to correction and why it is necessary, it doesn’t ease the financial burden or barrier to entry that many are facing,” he said.

“It is pleasing, however, that we are now seeing an alignment on this in the market, including adjusted expectations and the wise judgement that buyers and sellers are coming to market with.”

Mr McGlynn said he expected the market would correct in 2023 and with an uplift in spring activity predicted, he remains optimistic buyers and sellers will be able to advance their real estate plans.

“Across our key markets we recorded a 30 per cent jump in our open home attendance in August alone, which demonstrates that many are moving ahead with a longer-term view of home ownership,” he said. 

“While the prestige sector is not untouched by these economic conditions, it is impacted to a lesser extent. 

“This continues to be evident with strong prices achieved for quality residences in both auction and negotiation scenarios.

“Many participants at this end of the market are also now re-focusing their efforts following the end of the peak holiday season. As such, we expect activity to remain strong in this sector for the calendar year, while we navigate the transient market.”

Hayden Groves – Real Estate Institute of Australia (REIA)

REIA President Hayden Groves said the latest interest rate rise would likely to see home buyers take a more considered approach when making a buying decision.

He said while the latest interest rate rise would add financial pressure on recent home buyers, those with a solid deposit would benefit from income generated from the latest rate rise, while property values stabilise.

“In some areas, more listing stock is coming to market, giving buyers greater choice in a less frenetic market,” Mr Groves said.

“Those able to cope with this and any future rate rises are well positioned to confidently buy a home or investment that better suits their needs.”

Mr Groves said higher mortgage re-payments and its consequent impact on household spending was yet to fully play out as some banks delay higher repayments on existing mortgages by up to two months, but he added that, “the banks would have already factored in interest rate rises into their equation for anyone taking out a mortgage; that should add some comfort to first-time buyers in particular.”

“To get inflation under control, the RBA has to consider so many factors, such as retail spending and there is a lag in the data,” he said.

“We have not yet seen the community response – retail figures this week for July show an increase, so it is conceivable that the RBA may start the process of slowing down the size of rate hikes and wait for data, including the monthly CPIs, to assess the situation.”

Mr Groves said inflation was expected to peak this year before declining, and this would have an impact on rates.

“Unemployment remains its lowest in nearly 50 years which is a clear indicator that the economy should remain on track,” he said.

Eleanor Creagh – PropTrack

PropTrack Senior Economist Eleanor Creagh said the RBA had continued to “frontload” its hiking cycle, with the fastest cash rate rise since 1994 pushing property prices down 2.7 per cent nationally, since their March peak.

“Today’s rate hike will further increase borrowing costs and reduce maximum borrowing capacities, pushing property prices further down,” she said.

“The level of interest rates will be a key factor of housing market conditions and the pace and depth of home price falls in the period ahead.”

Ms Creagh said the economy had entered a “tightening cycle”, but while consumer confidence had fallen sharply, the unemployment rate was at a 48-year low and spending was yet to slow down. 

“These conditions have allowed the RBA to continue raising the target cash rate toward their estimates of the neutral rate, of 2.5-3.5 per cent, while monitoring the evolution of household spending as interest rates rise – a key source of ongoing uncertainty,” she said.

“However, the lagged effect of rate rises, the large share of variable rate borrowers ahead on repayments and some borrowers on fixed terms yet to expire, means many mortgage holders have not yet felt, or are only now beginning to feel, the impact of the initial rises.”

Ms Creagh said despite the downward price outlook, the property market was leaving winter behind, with a seasonally busier period ahead.

She said this spring would be less competitive for buyers than in 2021.

“There’s a lot more choice and less urgency, which could create opportunity for some,” she said.

“The balance in market conditions could make it easier to get into the market as stock isn’t moving as quickly and the fear of missing out has subsided. 

“For sellers, though prices are dropping and properties are taking longer to sell, prices are still up on pre-pandemic levels and selling quicker than before the pandemic onset.”

Graham Cooke – Finder

Finder Head of Consumer Research Graham Cooke said the combined cash rate rises this year would cost the average Australian homeowner an extra $801 per month compared to April this year.

“This fifth rate rise since May piles on the pressure for Aussie homeowners, who will have almost $10,000 less to spend on groceries, clothing and holidays compared to only six months ago,” he said.

Mr Cooke said borrowers who took out fixed rate home loans before the rate rises started wouldn’t notice a difference straight away.

“Fixed loan holders are in for a big shock once that rate expires and their payments spike,” he said. 

“Our figures show the average fixed-rate homeowner will be paying $600 extra per month come December.

“If you’re on a fixed rate, check now to see how much your repayments are likely to jump.”

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Kylie Dulhunty

Kylie Dulhunty is the Deputy 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”.