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RBA goes ‘hard’ with interest rate jump

Higher than expected inflation has seen the Reserve Bank of Australia lift the cash rate for the second consecutive month, with today’s 50 basis point increase taking the official interest rate to 0.85 per cent.

Outlining the reasoning behind the RBA board’s decision, Governor Philip Lowe said both domestic and international factors had all led to inflation that remained lower than many other advanced economies but was higher than anticipated.

“Inflation in Australia has increased significantly,” he stated. 

“Global factors, including COVID-related disruptions to supply chains and the war in Ukraine, account for much of this increase in inflation. 

“But domestic factors are playing a role too, with capacity constraints in some sectors and the tight labour market contributing to the upward pressure on prices. The floods earlier this year have also affected some prices.”

With two rate rises in two months, the cumulative 75 basis point jump adds about $200 per month to mortgage repayments on a $500,000 loan.

High inflation is expected to continue, with Dr Lowe tipping it would only decline back to the 2-3 per cent range in 2023.

“Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago. 

“As the global supply-side problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to moderate. 

“Today’s increase in interest rates will assist with the return of inflation to target over time.”

In addition to lifting the cash rate 0.5 per cent, the RBA also opted to increase the interest rate on Exchange Settlement balances by 50 basis points to 75 basis points.

In doing so, Dr Lowe noted the Australian economy remained resilient, growing by 0.8 per cent in the March quarter and 3.3 per cent over the year. 

“Household and business balance sheets are generally in good shape, an upswing in business investment is underway and there is a large pipeline of construction work to be completed,” he said. 

“Macroeconomic policy settings are supportive of growth and national income is being boosted by higher commodity prices. The terms of trade are at a record high.”

With the unemployment rate currently at 3.9 per cent, which is the lowest point in 50 years, Dr Lowe said the labour market was strong and could soon see a lift in wages.

However, he did flag household spending was now a source of uncertainty, especially given the increasing pressure on household budgets from higher inflation and interest rate rises.

“Housing prices have declined in some markets over recent months but remain more than 25 per cent higher than prior to the pandemic, supporting household wealth and spending,” he said. 

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

“While the central scenario is for strong household consumption growth this year, the Board will be paying close attention to these various influences on consumption as it assesses the appropriate setting of monetary policy.”

Dr Lowe said the Board would also be paying close attention to the global outlook, which remained clouded by the war in Ukraine and its effect on the prices for energy and agricultural commodities. 

“Real household incomes are under pressure in many economies and financial conditions are tightening, as central banks withdraw monetary policy support in response to broad-based inflation. There are also ongoing uncertainties related to COVID, especially in China,” Dr Lowe said.

Describing todays’ interest rate rise as “a further step in the withdrawal of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic”, Dr Lowe indicated there would be further rate rises ahead.

“The size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market. 

“The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”

Geoff Lucas – The Agency

The Agency Chief Executive Officer Geoff Lucas said the RBA had decided to “go hard” early with its 50 basis point rise after previously coming under fire for taking too long to make a move on interest rates.

He said now that the central bank had decided to move, it was looking to make big inroads to curb inflation.

“What they’re doing is they’re going hard early, and that is hard, rather than suffering death by 1000 cuts,” Mr Lucas said.

Mr Lucas said consumer sentiment had already fallen 4.1 per cent nationally following May’s 0.25 per cent increase and on the eastern seaboard, in Sydney and Melbourne, it had dropped further with 7.5 per cent and 7.2 per cent falls respectively.

He tipped this trend would continue and that would place pressure on discretionary spending and tip the real estate market in favour of buyers, who would act more cautiously.

“So with a 50 basis point increase, I think we will see consumer sentiment fall further,” Mr Lucas said.

“And what that’s likely to do is cause buyers to sit on their hands a little bit more.

“I think we’ve gone past the point of equilibrium in the market. It was a seller’s market and then buyers started to gain a little bit of ascendancy.

“But I think we’ve gone past that point now and it’s very much a buyer’s market.”

Mr Lucas said the fear of missing out buyers held just last year had disappeared and people would be more discerning with their property choices.

“I think we’ll see some pressure on discretionary spending and I think that probably exacerbates the case for a wages push,” he explained.

“I think that will start to hurt small businesses.”

While Dr Lowe said inflation was expected to increase further before winding back towards 2-3 per cent in 2023, Mr Lucas said there were a few signs that inflation may already “be nearing its peak”.

He said an article in the Australian Financial Review highlighted three key supply side factors behind world inflation levels had turned around, including the cost of computer chips halving.

“That was an indicator that there were really bad supply chain issues,” Mr Lucas said.

“But now the peak price for semiconductors has come off, in fact it’s half its peak.”

The spot rate for shipping containers has also dropped.

“That tells us about the costs of transporting goods and services and therefore the costs of goods and services in the future.

“So I think we’ve probably approaching peak inflation.”

Manos Findikakis – Agents’Agency

Agents’Agency Chief Executive Officer Manos Findikakis said he had anticipated today’s jump in the cash rate and people’s reaction to the 50 basis point rise would depend which camp you sat in.

“If you’re from the era of the ‘80s and ‘90s, you’re still going to turn around and say this is the cheapest money you’ve ever had access to, despite people’s borrowing capacity being limited,” he said.

“But if you’ve never experienced interest rate rises, it’s going to be the most expensive money that you’ve ever borrowed.”

Mr Findikakis said he told his team today that the key moving forward in the real estate market would be to show vendors and buyers confidence.

He said the past two years during Covid had proved that often what is predicted to happen doesn’t end up occurring and agents needed to focus on leading clients through the rate rises.

“The most important thing we need to focus on as real estate agents is confidence and the confidence that we’re giving our clients out there in the marketplace,” Mr Findikakis explained.

“The more confident we are, the more confidence we are going to relate to clients, whether they’re buying or selling, to make informed decisions based on their personal circumstances right now.

“We are going to be focused on the present, rather than trying to predict what’s going to happen in the future.”

Mr Findikakis said if the market was going to falter it would have done so during the peak of the pandemic, but it didn’t.

However, he did say today’s rate rise would impact general sentiment initially, but he expected a push for higher wages would materialise and boost confidence again.

“In the past, when inflation has increased, we’ve seen people take a more modest approach to discretionary spending in terms of going to the more casual restaurants instead of the upmarket ones and more Netflix instead of Gold Class,” Mr Findikakis said.

“So I think discretionary spending will be more affected before any dramatic shift in the property market.

“I think there will be a slowdown in the volume of sales as people readjust and reacclimatise to the new market, and then we will go back to normal.

“It’s the peaks and troughs of the real estate market.”

Nigel O’Neil – The Barry Plant Group

Barry Plant Group Chief Executive Officer, Nigel O’Neil said after last month’s moderate interest rate hike he had anticipated the RBA might be a little more aggressive in their increase this time around.

“I fully expected they might play a little catchup and that looks to be the case,” he noted.

But he said it was interesting the way the sharemarket had reacted, with the ASX All Ordinaries quickly dropping after the RBA announcement was made.

Mr O’Neil said it was important to note interest rate hikes had been factored into the Australian Prudential Regulatory Authority’s (APRA) lending criteria when they introduced the 3 per cent buffer back in 2021.

Meanwhile, Mr O’Neil said the interesting thing to watch would be the extra squeeze on the household budget due to the higher cost of essentials such as groceries and petrol.

“There’s a lot of pressure on households at the moment and while interest rate rises might have been factored in, the cost of living is adding additional strain.”

And this is where Australian households might take advantage of the extra contributions they have made to their loan repayments due to savings during the pandemic.

“People who are ahead on their loans might draw on them to manage these increased costs over the coming period,” he said.

Looking at how last month’s first interest rate hike in over a decade had affected the Melbourne market where the Barry Plant Group operates, Mr O’Neil said there was a definite softening occurring.

“For agents that means there will be a lot more hand holding with buyers and a lot more direct conversations with vendors.

“The market is contracting and that means agents need to be having robust conversations with their clients early on about exactly what the market is doing.”

Hayden Groves – REIA

The Real Estate Institute of Australia (REIA) said the RBA’s second of a series of planned rate rises furthered the need for a holistic housing and rental supply solution for Australians.

REIA President Hayden Groves said the latest interest rate rise of 50 basis points would impact those with larger mortgages in particular.

“The cash rate sitting at 0.85 per cent will impact on households carrying a high amount of debt and will lead to an overall reduction in housing affordability by around 2.4 per cent,” he said.

“The reality is that there is still a chronic undersupply of homes to both buy and rent across Australia so until this is addressed – including dealing with the construction backlog for new homes – we are unlikely to see any drastic shifts in response to the RBA’s rate rise agenda.

“In general, this is likely to play in the market by stabilising house price growth and sustained low vacancy rates and return to a new normal rather than the catastrophic reductions as some property commentators suggest. 

“Certainly, transaction numbers are likely to abate as we move through this cycle.”

Mr Groves said the rise in interest rates reiterated the urgent need for a national plan that addressed housing affordability and supply, which had been committed to by the Albanese Government.

“The National Plan for Housing is badly needed to address the complex fiscal and monetary conditions Australians are being subjected to that deals with the fundamentals of housing supply,” he said.

“Australians are relying on this as the proportion of median income required to meet mortgage repayments will rise by 6.2 pe cent if the cash rate hits 2 per cent.”

Mathew Tiller – LJ Hooker

LJ Hooker Group Head of Research Mathew Tiller said the official cash rate rise would likely see price growth continue to soften in metropolitan areas and a normal market emerge bringing some relief for homebuyers.

While higher rates will further add to the cost-of-living pressures households faced, the OCR remained low in comparison to the 10-year average of 1.50 per cent. With unemployment levels at their lowest in 48 years, mortgage holders still had the ability to service their loans. 

Mr Tiller said strong housing price growth, over the past two years, had pushed housing affordability down and this had also begun to weigh on buyer demand. 

“Property prices continue to trend lower in Australia’s two largest property markets, Sydney and Melbourne, while the other capital cities – Adelaide, Brisbane and Perth – have seen buyer demand remain resilient and listings remain very tight pushing prices higher,” Mr Tiller said.

“The good news for buyers is that listings numbers have also begun to rise from very low levels. Across the LJ Hooker network were nine percent higher in the month of May 2022 compared to April 2022.

“The RBA’s decision to act quickly to curb inflation has been expected with both buyers and sellers factoring in the cycle of rate rises into their budget.”

Looking forward, Mr Tiller said the RBA was tipped to further increase the cash rate in 2022, in line with central banks around the world, in order to tackle inflationary pressures. And while the economy faced some challenges, the GDP growth was still positive and population growth was strengthening as international borders continue to open up.

Mr Tiller said many mortgage holders had spent the past two years saving and paying down their home loan rather than spending on big ticket items such as overseas holidays.

“The capital growth that people have built up over the two years has been quite substantial and those who have held longer for two years is considerable,” he said. 

“There were also a lot of people who were able to get ahead on their mortgage and save money – so there is a fair amount of buffer for many people.” 

Tim Lawless – CoreLogic

CoreLogic Research Director Tim Lawless said while today’s interest rate rise was widely anticipated, the 50 basis point hike was higher than many expected.

And he noted with inflation increasing sharply, there would be more to come. 

“With underlying inflation moving sharply higher to be up 3.5 per cent over the year, the RBA’s heavy lifting on the cash rate still has some way to go, with interest rates likely to consistently rise through the second half of the year and into 2023,” Mr Lawless said.

With the cash rate increasing, he predicted banks would swiftly pass on the rise, taking the average variable interest rate for a new owner occupier loan to around 3.1 per cent. 

“Together with the 25 basis point increase handed down last month, the cumulative 75 basis point lift in mortgage rates will add approximately $200 per month in additional repayments on a $500,000 mortgage compared with mortgage rates in April,” Mr Lawless said.

“While higher interest rates will lower borrowing capacity, less household savings and tighter balance sheets will also weigh on serviceability assessments for prospective borrowers, adding to diminished demand for home purchases.”

Settled sales estimates from CoreLogic indicate dwelling sales over the three months to the end of May were 19 per cent lower than the same time last year. 

Mr Lawless said a similar trend could be seen in home lending data from the ABS, where the number of new mortgage commitments is also trending lower.

“In a double whammy for indebted households, the additional cost of debt comes as non-discretionary inflation rises at more than twice the pace of prices for discretionary goods,” he noted.

“Higher costs for food, fuel and finance are likely to see household savings continue to taper as families funnel more of their income towards servicing their mortgage and funding essential costs of living.”

In terms of what that means for housing markets, Mr Lawless said higher mortgage rates added further downside risk to values, which are already trending lower in Sydney and Melbourne, and losing steam in the rate of growth across most other markets. 

“Importantly, home values were already easing well ahead of a rising cash rate. 

“A combination of higher fixed mortgage rates, lower consumer sentiment, tighter credit conditions and worsening affordability have all played a role in the slowdown to-date.

“While we expect the housing downturn evident in Sydney and Melbourne will gradually spread to other regions, the trajectory for this will depend on how fast and how high interest rates move and normalise, along with the performance of the broader Australian economy and labour market. 

“A stronger economy, along with the tightest labour market conditions in a generation, should help to ensure the ensuing housing downturn remains orderly.”

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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”.

Kylie Dulhunty

Kylie Dulhunty is the Editor at Elite Agent.