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Interest rates rise to highest level since April 2012

The Reserve Bank of Australia has lifted interest rates a further 25 basis points to take the cash rate to 4.1 per cent.

It’s the 12th hike in this tightening cycle and it brings the cash rate to its highest level since April 2012.

In his monetary policy statement RBA Governor Dr Philip Lowe said inflation in Australia had passed its peak but at 7 per cent it was still too high and it would take “some time” to return to the target 2-3 per cent range.

“This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe,” Dr Lowe said.

He said high inflation makes life difficult for people and damages the economy, eroding the value of savings, hurting family budgets and making it harder for businesses to plan and invest.

Tackling it now, via interest rate rises, would stave off more costly measures later, Dr Lowe said. 

“Recent data indicate that the upside risks to the inflation outlook have increased and the Board has responded to this,” he said.

“While goods price inflation is slowing, services price inflation is still very high and is proving to be very persistent overseas. 

“Unit labour costs are also rising briskly, with productivity growth remaining subdued.”

The central bank said the economy had slowed and labour market conditions had eased slightly, with unemployment up a little to 3.7 per cent in April.

Wages growth has picked up and Dr Lowe said the RBA Board remained alert to the risk that expectations of ongoing high inflation contribute to larger increases in both prices and wages.

He said the Board still sought to keep the economy on an “even keel” as inflation returned to target.

“A significant source of uncertainty continues to be the outlook for household consumption,” he said.

“The combination of higher interest rates and cost-of-living pressures is leading to a substantial slowing in household spending. 

“Housing prices are rising again and some households have substantial savings buffers, although others are experiencing a painful squeeze on their finances. 

“There are also uncertainties regarding the global economy, which is expected to grow at a below-average rate over the next couple of years.”

Dr Lowe said some “further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve”. 

Geoff Lucas, The Agency

The Agency Managing Director and Group Chief Executive Officer Geoff Lucas said inflationary pressures were again the driver of the RBA’s decision to increase interest rates.

“Despite some people’s wishful thinking – inflation is and will continue to prove stickier and harder to move than most people had hoped for,” he said.

“Unfortunately for mortgage holders, due to the latest data, I don’t think that this will be the last of the interest rate rises and it is also unlikely that we will now see interest rates falls this calendar year.”

Mr Lucas said the minimum wage increase of 5.75 per cent would contribute to inflation when it comes into effect next month due to the increase in costs to businesses and the flow on effects to the costs of goods and services.  

He also said the impact of rising rents was yet to be fully felt.

“While rents are currently rising at an annualised rate of 6.1 per cent in the latest April CPI data, this is based on actual costs as opposed to advertised prices and we are yet to see the 20-25 per cent rental growth that we have seen over the last 12 months filter through into the inflation rates,” Mr Lucas said.

“This is a ‘sleeper’ that will continue to have a material upward impact on inflation for months to come.”

Mr Lucas said the inability to knock inflation on its head meant it was more likely than ever that the mortgage cliff would hit and hit harder than first anticipated.  

“Over 850,000 fixed rate loans are due to roll over to variable rates between July and December this year – so despite a common belief that increases in rates haven’t had an effect – in many cases the rates haven’t actually changed yet, but they are about to go from circa 2 per cent to circa 6-6.25 per cent,” he said.

“On a positive note the price volatility that has been in the market place is continuing to subside and people can transact with more certainty than they have had in recent months and years.”

Mr Lucas said buyer confidence had grown and this was evident in the strong improvement in clearance rates and recent uptick in prices.

“We are also seeing a new wave of would-be first home buyers who are, for the first time ever, seeing their deposits grow with material interest being credited to their accounts,” he said.

“Well educated buyers will reap the rewards of the current market conditions.”  

Manos Findikakis, Agents’Agency

Agents’Agency Chief Executive Officer Manos Findikakis said he was surprised the RBA had opted to lift interest rates again given sentiment on the ground had changed.

“I think this time around they’ve gone a little bit too hard,” he said.

“I think they’ve gone a little hard and we’re going to feel it, because we’re at the coalface and we were already feeling how the previous interest rate rises were affecting everyday Aussies.”

Mr Findikakis said the market had plateaued and while his team had a strong May, he said vendors were meeting the market and that was drawing buyers in.

He said they hadn’t seen distressed sales as yet but some vendors had opted to sell and buy another property to reduce their mortgage payments.

“We’re not seeing distressed sales, but we are seeing a lot of people being cautious and selling,” Mr Findikakis said.

“Their capacity to borrow has dwindled enormously and this extra one is going to affect it even more.

“I think it’s really going to impact winter.”

Thomas McGlynn, BresicWhitney

BresicWhitney Chief Executive Officer Thomas McGlynn said while interest rate rises would continue to limit purchasing power, they were no longer a significant barrier for buyers. 

“This became markedly clear in May when demand intensified across both the on and off-market selling environments,” he said.

“Our auction clearance rate is sitting at a high of 86.1 per cent, which as we know, is a widely accepted barometer of buyers’ intentions and confidence. 

“The ‘mortgage cliff’ has also not been as steep as some expected and at the same time, owners have taken note of these shifts and are pursuing their opportunities.”

But Mr McGlynn said perhaps the greatest indicator of the turnaround was the 4.5 per cent increase in Sydney house prices over the three months to May.

” As the data begins to reflect more current sales results it is likely the data will tell an even more compelling story,” he said.

“While it’s all but impossible to predict exactly what lies ahead, what we do know is that the recovery of the market is quite well advanced, and that there has been a major shift in the narrative and sentiment we were dealing with six months ago.”

Mathew Tiller, LJ Hooker Group

LJ Hooker Group Head of Research Mathew Tiller said the RBA’s decision to increase interest rates was unlikely to push property prices down, with a shortage of listings and high demand continuing to drive growth.

He said strong population growth and tight employment markets had also added buoyancy to the property market.

“The RBA’s focus at the moment is on reducing inflation and the latest data show it is coming down but remains sticky and is not falling as fast as anticipated,” Mr Tiller said.  

“Today’s decision shouldn’t lead to a flood of mortgagee repossessions hitting the market, but it is likely there will be homeowners looking to downsize their mortgage as a way of managing their household budget, so we are expecting listings to slowly rise. 

“Property markets are more positive for homeowners who do decide to list with elevated auction clearance rates, rising prices and higher attendances at open homes all pointing to a stronger winter selling season.“

Mr Tiller said property prices had also benefited from buyers trying to pick the bottom of the market.

In addition, there are owner-occupiers looking to upgrade with unemployment low and wages growing. 

“We often hear about the FOMO during the peak of the market, but the same mindset also occurs when people are trying to buy before the prices start increasing, so you have a lot of people looking to purchase at the moment,” he said.  

“We didn’t have the traditional spring market last year with many vendors sitting on their hands as prices soften, so we are anticipating a stronger end-of-the-year with more listings as selling conditions improve. 

“The opportune time to sell is now before the traditional selling season.” 

Nerida Conisbee, RayWhite

Ray White Chief Economist Nerida Consibee said while interest rate rises were unlikely to lead to a recession, they would continue to prove a “headache” for the housing sector. 

“While monetary policy is not a mechanism to sort out the housing market, if we want everyone to have a roof over their heads, it would be a good idea for the increases to stop now,” she said. 

“As more countries head into recession, at this point, it does look like the RBA’s “narrow path” will get us through while taming inflation. 

“In the meantime however, it is creating a headache for renters, buyers and new housing supply that is going to take many years to resolve. 

“And every interest rate rise is extending that pain. 

“Rents are rising at their most rapid rate ever recorded, housing approvals are now at their lowest level in more than a decade and this housing shortage pressure is now flowing through to house prices. Rising rates are part of the problem.”

Ms Conisbee said higher interest rates had lead to investors exiting the market and this had pushed rents higher, while developers were struggling to get projects off the ground due to a combination or high interest rates and construction costs.

“Fewer homes and high population growth means higher rents,” she said.

“Rising rents means higher inflation, which means higher interest rates, which means even fewer investors and fewer homes.”

Ms Conisbee said property prices were rising, and while this might seem counterintuitive in a high interest rate environment, it was reflective of what was happening in the rental sector.

“Population growth is strong and there are too few homes,” she said.

“Add to this however is that sellers are sitting on their hands. New listings are down over 20 per cent.

“No property cycle is ever exactly the same and this time around, interest rate rises are making housing so much more expensive whether you want to buy, rent or build.”

Dan Argent, UrbanX

UrbanX Chief Energy Officer Dan Argent said inflation had proved to be “stickier” than economists first hoped and today’s 12th rate rise was “unlikely to be the last”.

He said the economy was starting to feel much like it did in 2009-2010 when the RBA increased interest rates to 4.75 per cent, ahead of a market crash.

“We are now less than three more rate increases from that number, and if that happens, the outcome is not likely to be great,” Mr Argent said.

But he said the good news for agents was that, no matter what the economy does, people still need to buy and sell property.

“Saying that, if the experience from 2010 is anything to learn from, sales volume can drop dramatically, and the best agents will be shoring up their finances to weather any potential financial storm on the horizon,” he said.

“Secondly, with more agents leaving the industry as it gets tougher, this is the time for the best agents to grow their market share. 

“If, for example, you have a 20 per cent market share currently, now is the time to grow to 30-40 per cent.”

Eleanor Creagh, PropTrack

PropTrack Senior Economist Eleanor Creagh said persistently high inflation, combined with the recent decision to increase the minimum wage 5.75 per cent left the door open for the RBA to lift interest rates again.

She said core inflation pressure remained strong, while services inflation was persistent and both headline and trimmed mean inflation were still well above the RBA’s target range of 2-3 per cent.

“The latest monthly inflation read indicated an acceleration in inflation momentum,” Ms Creagh said.

“This was considered against signs the substantial tightening already pushed through is weighing on economic activity. 

“Consumer spending and employment growth are slowing, while business surveys indicate weaker conditions are expected in the coming months as economic activity slows.”

Ms Creagh said the labour market remained tight and while unemployment had increased slighting, it was still close to multi-decade lows.

“The pipeline of wage increases in the public sector and minimum wage decisions are expected to maintain wages pressure, potentially fuelling inflation to remain elevated,” she said.

“The risk of a wage-price spiral is an ongoing concern for the central bank. 

“This gave the RBA headroom to further raise the cash rate, reaffirming its commitment to overcome the challenge of high inflation and anchoring inflation expectations.

“The RBA expects it will take a couple of years before inflation returns to the top of the target range, with the statement highlighting that the board is ready to do more to get inflation back down should it be necessary.”

Ms Creagh said the RBA’s May rate rise had not slowed the home price rebound, with low stock levels putting a floor under prices.

“After five consecutive months of national home price growth, stronger market conditions are more pervasive, and price rises are more widespread,” she said.

“Strong demand relative to stock on market is seeing home prices lift, and offsetting the downward pressure from continued interest rate rises. 

“The pace of price rises may slow with interest rates lifting further, particularly if the flow of new stock coming to market increases. 

“However, the factors precipitating stronger housing demand – population growth and tight rental markets – remain alongside an undersupply of new homes. This may see home prices to continue to lift in the months ahead.” 

Louisa Sanghera, Zippy Financial 

Zippy Financial Director Louisa Sanghera said mortgage holders were really starting to feel the pinch, especially as a result of the past two interest rate rises.

“Today’s rate hike is going to tip some people into hardship for sure,” she said.

“We’re being advised that 27.8 per cent of mortgage holders are considered at risk.

“Not only have people had to endure the rate rise but they’re having increases to all household living expenses as well. 

“The financial pressure is coming at them from all areas of their lives.”

Ms Sanghera said Zippy Financial’s clients were constantly on the phone to them now and were looking for ways to cut their discretionary spending.

But she said some people had nothing to cut back on.

“People are using their savings to live and that will only last them so long,” she said.

“Our investors are being hit big time, with multiple properties, they’ve got increases across multiple mortgages and I think you’ll see more investors put their properties on the market in the coming months if the rate hikes don’t stop.”

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Kylie Dulhunty

Kylie Dulhunty is the Editor at Elite Agent.