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RBA doubles down on interest rates as REIA says housing affordability at its worst this century

The Reserve Bank boss has doubled down on the need for this week’s interest rate hike, despite admitting some households are feeling the pinch and mortgage arrears have increased.

Speaking at the investment bank Morgan Stanley’s 5th Australia Summit, RBA Governor Dr Philip Lowe said the central bank had to return inflation to target and that required a sustainable balance between demand and supply. 

“The tool that the RBA has to achieve this balance is interest rates,” he said.

“I acknowledge that the use of this tool comes with complications. 

“Its effects are felt unevenly across the community, with rising interest rates causing significant financial pressure for some households. 

“But this unevenness is not a reason to avoid using the tool that we have.”

This week’s 25 basis point hike was the 12th in this tightening cycle, with the cash rate now sitting at 4.1 per cent.

RBA Governor Dr Philip Lowe.

Dr Lowe said had the Board not lifted interest rates, some Australians would have avoided the added pressures that come with higher mortgage rates, but only for a short time.

“But this short-term gain would have been at a much higher medium-term cost,” he said.

“If we had not tightened monetary policy, the cost of living would be higher for longer.

“This would hurt all Australians and the functioning of our economy and would ultimately require even higher interest rates to bring inflation back down. 

“So, as difficult as it is, the rise in interest rates is necessary to bring inflation back to target in a reasonable timeframe.”

Dr Lowe’s comments came as the Real Estate Institute of Australia (REIA) revealed housing and rental affordability and first home ownership all declined in the March quarter.

REIA President Hayden Groves said mortgage holders now faced the worst housing affordability since September 2008, with the proportion of income required to meet the average home loan repayment rising to 44.9 per cent.

“The RBA Cash rate has been increased to 3.6 per cent by the March quarter and their successive rate increases are not intensely apparent in our housing affordability,” he said.

“Affordability has declined in all States and Territories except Tasmania and the Northern Territory.

“New South Wales, Victoria and South Australia had the worst housing affordability result this century with South Australia suffering the worst decline at 1.1 percentage points.

“To put this in perspective, nationally the average loan repayment increased to $4537 over the March quarter, which is a whopping increase of 35 per cent over the past 12 months. 

“This will of course be starker in cities where it is more expensive to buy and bigger loans are needed to secure housing.”

Mr Groves said that rental affordability increased 0.5 percentage points to 23 per cent. 

This is a stark reminder that it remains more affordable to rent that own property in Australia, despite recent media attention that would suggest differently.

“Rental affordability declined in all states and territories, except in the Australian Capital Territory, where it improved.

“This is the worst affordability result for renters since September 2022 however falls well short of the rental affordability crisis of the 2009 Global Financial Crisis where income to rent required exceeded 26 per cent.

“Victoria is the most affordable state to rent with rent to income required sitting at 19% and Tasmania the least affordable at 28.9 per cent.”

Mr Groves said that over the March quarter 2023, the number of first home buyers decreased in all states and territories.

“The number of first home buyers decreased to 21,150, a decrease of 17.9 per cent during the quarter and a decrease of 27.3 per cent compared to the March quarter 2022.”

Dr Lowe said that going forward the rate of mortgage arrears would be one of a number of factors the Board would monitor.

“These remain very low, although they have increased a little of late,” he said in his speech.

“Banks report that their customers are managing to make their mortgage payments, although many have had to cut back on other spending. 

“So, it is a complicated picture.”

Dr Lowe said the Board would also keep a close eye on the global economy, household spending and growth in labour costs.

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Kylie Dulhunty

Kylie Dulhunty is the Editor at Elite Agent.