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RBA keeps cash rate on hold but rise likely in 2023

Despite a rise in inflation, the Reserve Bank of Australia has again opted to keep the official cash rate on hold at 0.1 per cent, issuing an optimistic forecast for the economy over the coming months.

In his monthly statement today, RBA Governor Dr Philip Lowe noted although the headline CPI inflation rate had risen to 3 per cent on the back of increased petrol prices, disruptions in the global supply chain and higher prices for newly constructed homes, underlying inflation remained low at 2.1 per cent.

“The central forecast is for underlying inflation of around 2.25 per cent over 2021 and 2022 and 2.5 per cent over 2023,” Dr Lowe stated. 

“The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range.”

Dr Lowe said this would require the labour market to be tight enough to generate wages growth that is materially higher than it is currently. 

“This is likely to take some time. 

“The Board is prepared to be patient, with the central forecast being for underlying inflation to be no higher than 2.5 per cent at the end of 2023 and for only a gradual increase in wages growth.” 

In general, Dr Lowe had a positive outlook for the economy, explaining there was likely to be GDP growth of 3 per cent over 2021 and 5.5 per cent and 2.5 per cent over the following two years.

However, there are uncertainties in terms of current disruptions to global supply chains and the behaviour of wages at the lowest unemployment rate in decades.

That unemployment rate is also predicted to trend lower over the next couple of years, reaching 4.25 per cent at the end of 2022 and 4 per cent at the end of 2023.

In terms of real estate, Dr Lowe noted house prices continued to rise in most markets and housing credit growth had picked up due to stronger demand for credit by both owner-occupiers and investors. 

“The Bank welcomes APRA’s recent decision to increase the interest rate serviceability buffer on home loans,” Dr Lowe said. 

“It is important that lending standards are maintained at a time of historically low interest rates.”

Andrew Acton, Explore Property

Explore Property Leader Andrew Acton said the RBA’s decision to maintain the official cash rate came as little surprise and would likely lead to continued confidence in the property market.

“People feel confident to borrow and invest without question,” he said.

Looking to the future, Mr Acton said he believed the capital cities would continue to boast a strong property market over the months ahead, but it would be regional and northern Australia that would enjoy a long path of prosperity.

“I think the market will stay powerful and energetic but the stock levels may decline further,” Mr Acton predicted.

“Homeowners are selling to capitalise but some won’t sell even at a good return because they simply need to live somewhere. 

“You buy and sell in the same market, so the owner-occupier transactions could steady.”

In terms of investors, he said the market was likely to continue to gain pace as people looked for the mix of returns and capital gains.

Meanwhile, he had a timely reminder for agents, urging them to maintain best practice and use the current market to their advantage.

“If stock levels quieten down the more prominent and hard working agents will shine,” Mr Acton said.

“Markets like this make up a relatively small percentage of our overall career so I’m encouraging our agents to save money, pay down debt, connect with their sphere of influence and work hard at creating connections off the back of their profile.”

Andrew Cocks, Richardson & Wrench

Richardson & Wrench Managing Director Andrew Cocks said despite the reaction to the “unsurprising” increase to the CPI in September, it was likely the uncertainty of the economic recovery would see interest rates maintained for the foreseeable future, with the RBA not blinking in the face of growing noise from the commentariat.

“While it’s very likely (and necessary given the significant contraction that occurred during the NSW and Victorian lockdowns) that there will a significant bounce-back over the next few months, the major concern is the long-term strength of the economy,” he said.

“The economy will continue to bounce around for some time and it will take a while for the long-term trends to become clear.

“Despite the initial post-lockdown euphoria that many are feeling, there has been significant damage done to many businesses across many sectors in the economy,” he continued.

“With a large part of the CPI increases being as a result of supply issues due to the disruption to global supply chains, there will be a period of normalisation required for markets to achieve their equilibrium.”

Mr Cocks said the RBA was focussed on sustainable CPI and real wages growth and there remained some significant challenges in many sectors which would weigh on the long-term strength of the economy.

“As the RBA reinforced again today, it will need both CPI to be sustainably maintained within the 2-3 per cent range and real wages growth to be apparent over a sustained period.

“With international borders opening up and the Federal Government flagging that it is going to significantly increase both long-term migration and short-term temporary worker visas, there will continue to be pressure on real wages growth which has been a real concern of the RBA’s for some time.”

Mr Cocks said the property market was already seeing some moderation.

“The unsustainable price growth that most developed international markets have experienced appears to be subsiding,” he noted.

“In Australia, there are already clear signs that the rate of growth in property prices has started to decline, with many buyers heading to the exits and interest rates for many products starting to gradually increase.

“Combined with some initial tightening in lending standards, there are clear signs that the property market is starting to lose some of its puff.

“Any rapid and premature movement in interest rates will potentially change what could be an orderly adjustment to more sustainable market behaviour to a full-blown stampede out of the market which would be harmful to the entire economy.

“The RBA is only too aware of that.”

Geoff Lucas, The Agency

The Agency Chief Executive Officer Geoff Lucas said the RBA had held the cash rate as expected and while there had been a lot of speculation about interest rate rises in recent weeks, he didn’t expect to see any for about a year.

“There are significant inflationary forces, both internationally and, last week, we saw the Australian inflation numbers at the high end of the expected range,” Mr Lucas said.

“That gave rise to a lot of speculation that interest rates would increase earlier, and that it would force the hand of the RBA earlier than previously expected because the RBA has been saying nothing until 2024. 

“As a result of the inflation numbers last Wednesday, a lot of economists are now suggesting that there will be a rate rise as early as May 2022. 

“I don’t agree with that. I think that rates will remain steady.”

Mr Lucas said some portion of the inflationary pressures at the moment were being triggered by a “transitory” global supply chain issue which is an effect of the COVID-19 pandemic.

He said goods were in short supply, shipping times had blown out and this had pushed prices up.

“A lot of that is contributing to these inflation numbers, but that will eventually settle down,” Mr Lucas said.

“What the RBA is trying to determine is how much of those inflation numbers are attributed to this transitory issue. 

“So until they work that out, they’re probably not going to take any action.

“The RBA will stay put for a little while and won’t change interest rates for the majority of next calendar year.”

But Mr Lucas said speculation about interest rate rises was “healthy” as it made buyers take a more cautious approach to buying and lending.

“They’re actually doing the mathematics and thinking, ‘Gosh, if interest rates do increase by half a per cent or one per cent, what does that mean?’” he said.

“I think that’s a good thing because previously, we’ve seen rampant price increases, which exacerbated the affordability issue.

“We believe the national price increase in the 2022 calendar year will be between four and six per cent.”

Manos Findikakis, Eview Group

Eview Group Chief Executive Officer Manos Findikakis said the cash rate decision, while expected, was based on the current affordability challenge.

“While the demand is at record highs we are definitely reaching the point where the ability to borrow will slow the dramatic price rises and subsequently suppress the market for the remainder of the year,” he said. 

“We are feeling a plateau in house prices but do believe the volume of sales will continue.”

Mr Findikakis said October was “the busiest on record” with days on market dropping to under seven days across the group in every state.

“New listings volumes were 10 per cent higher than sales so in effect we were replacing each sale with a new listing,” he said.

Mr Findikakis said there was pressure for wage growth given increased cost of raw materials and supply chain blockages causing household items and the cost of the weekly shop to rise.

Petrol price hikes also add to the inflationary pressures and with lockdowns over and people returning to work this cost will only rise.

“We are navigating uncharted waters,” Mr Findikakis said.

“These inflationary pressures will indicate we will see rises in interest rates in 2023, ahead of the estimated 2024.

“It is prudent for borrowers to look at long-term fixed rates.

“Two fundamentals will continue to apply. Firstly, borrowing affordability based on  expected increased interest rates in the next 12 to 24 months and, secondly, job security with proportional wage growth.”

Mr Findikakis urged buyers and sellers to consider their personal positions and make informed decisions based on their circumstances and property goals. 

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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 Deputy Editor at Elite Agent.