The Reserve Bank of Australia has lifted the official cash rate by 25 basis points following its first meeting of 2023, taking rates to their highest level since 2012 and flagging that further rises are likely in the months ahead.
Announcing the decision, RBA Governor Philip Lowe said that stubbornly high inflation rates were a key motivation for the cash rate increase.
โIn Australia, CPI (consumer price index) inflation over the year to the December quarter was 7.8 per cent, the highest since 1990,โ he said.
โIn underlying terms, inflation was 6.9 per cent, which was higher than expected. Global factors explain much of this high inflation, but strong domestic demand is adding to the inflationary pressures in a number of areas of the economy.โ
Dr Lowe said that while inflation was forecast to decline in 2023, it was โimportant that this remains the caseโ.
โThe Boardโs priority is to return inflation to target. High inflation makes life difficult for people and damages the functioning of the economy. And if high inflation were to become entrenched in peopleโs expectations, it would be very costly to reduce later,โ he said.
Dr Lowe acknowledged that the RBAโs cash rate rises had already caused pain for some households.
โSome households have substantial savings buffers, but others are experiencing a painful squeeze on their budgets due to higher interest rates and the increase in the cost of living. Household balance sheets are also being affected by the decline in housing prices,โ he said.
He said that there was some uncertainty about when household spending would slow.
โThe Board recognises that monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments,โ he said.
Despite this, Dr Lowe flagged the strong possibility of further cash rate rises to come in the months ahead.
โThe Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary,โ he said.
โIn assessing how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.โ
Geoff Lucas – The Agency
Chief Executive Officer and Managing Director of The Agency, Geoff Lucas said todayโs 25 basis point cash rate rise was expected and he tipped another could be on the cards in March.
โDue to recent economic data, and specifically US wages data, itโs possible we may see a further interest rate rise of 25 basis points at the March RBA board meeting before a period of stability,โ he said.
โAs it takes two to three months for rate rises to work their way into borrowersโ pockets, such a move would be fully impacting borrowers by May 2023.
โThis will combine with almost 25 per cent of borrowers coming off fixed rates of circa two per cent onto rates of circa six per cent between June and December 2023.โ
Mr Lucas said buyers had just gone through the greatest rate of interest rate increases many had ever seen and this had created uncertainty and a reluctance to buy and sell.
But he said that market uncertainty was winding back as borrowers could see the RBA terminal rate approaching.
โThere is material friction in the Australian residential marketplace, two of these friction points in particular are interest rate uncertainty and stamp duty,โ Mr Lucas said.
โFriction retards the natural ability of Australian families moving homes as their requirements change.
โThe removal of interest rate uncertainty reduces the marketplace friction to some degree and we believe this will lead to a greater propensity to transact in the second quarter of the 2023 calendar year (from April) โ as consumers become more comfortable about what the future looks like and they can price in that change.โ
Mr Lucas said national price reductions of between four and six per cent were expected in 2023, with most falls in the next six to nine months.
โThose initial falls will be followed by a stabilisation in the market, which will be aided by immigration most notably from China and consequently a more robust last quarter,โ he said.
Looking at individual markets:
Brisbane is experiencing the greatest rate of house price reduction in the country right now and it is poised for a stronger recovery due to the relatively low cost of living and migration patterns. It is underpinned in the medium to long-term by the 2032 Olympic Games. We believe these factors demonstrate strong value in the Brisbane and broader South East Queensland market.
Melbourne is, in the long-term, tipped to be the most populous Australian city. Its rate of appreciation over the past five years has been significantly less than its competitor, Sydney, and we believe it therefore represents strong medium-term value. We therefore expect to see a stronger than normal recovery when the recovery comes.
Perth has remained very robust and we expect to see that market remain steady and growth to match the broader Australian market, subject however, to vagaries in the mining sector.
Manos Findikakis – AgentsโAgency
AgentsโAgency CEO Manos Findikakis said in recent weeks there had been an uptick in sales volumes and he didnโt expect todayโs cash rate decision would alter that trend.
โI definitely think this 0.25 per cent is going to continue that trend,โ he said.
โThereโs already talk about interest rates dropping at the end of the year.โ
Mr Findikakis said the current property market was still in buyers’ favour but vendors were aware the bottom of the market was approaching.
โWeโre probably at the bottom,โ he said.
โThere may be a few percentage points to drop a little bit more, because I think thereโs going to be an influx of stock and a few people refinancing.โ
Mr Findikakis said agents in his group were also speaking to a lot of investors with multiple properties who were looking to sell one.
โThereโs a lot of talk in that space from investors,โ he said.
โThose people that’ve got two or more properties are looking at offloading at least one, to be mindful of cash flow because they donโt expect rental growth to increase any further.โ
Mr Findikakis said there were still many positive factors in the property market and there would not be a huge crash.
โThereโs been a correction and I think thatโs all that we can look at it as,โ he said.
Mike McCarthy – Barry Plant Group
Barry Plant Group Chief Executive Officer Mike McCarthy said while it was inevitable there would be a rate rise today, it was โpleasingโ the RBA had not opted for a double-whammy 50 basis point increase.
โI think given the recent two inflation numbers, there’s no surprise whatsoever with todayโs announcement,โ he said.
โI think probably the one pleasing element is that itโs only 0.25, because there was a lot of speculation that the Reserve Bank may have gone harder – I think that would have been bad news for many homeowners who are already struggling to make their mortgage repayments, who will find it increasingly difficult as rates continue to rise.โ
He said the impact of the latest rate rise would vary significantly between borrowers, with those who entered the market at its peak most affected.
โYou’ve got some people who are managing it quite comfortably, and obviously those on higher incomes and lower mortgages can manage to absorb that into their budgets, depending on their other commitments, of course,โ he said.
โFor those who’ve come into the market recently, and bought on the basis of a 2.5 or 3 per cent variable factor in terms of their loan (at the time of application), that’s now putting them under real pressure.
โSo I think a further interest rate rise is going to mean that those who have now absorbed that 2.5 or 3 per cent buffer when they originally borrowed, they’re going to find it increasingly difficult. And I think we’re going to see some pain in the market out there around that.โ
He urged the RBA board to assess how rates were affecting this borrower group before making its next decision.
โI think they certainly need to take that into account before the next interest rate because the impact of the interest rate rises does take some time to flow through,โ he said.
โMy concern is that they were far too slow to raise rates initially, when business could see what was happening in the labour market, in terms of the pressures that were coming.
โAnd my concern now is that they may potentially go too farโฆ So I think we move forward with some caution, but obviously, we’ve got to get inflation under control – we can’t let it run around the best part of 8 per cent indefinitely.โ
He said that the series of rate hikes that occurred in 2022 were already having a material impact on the property market.
โFor every potential borrower, it means that their budget, and their ability to borrow, is now decreasing,โ he said.
โUnless their salaries increase, or their source of deposit increases, their borrowing capacity decreases.
โSo that certainly has a material impact on just about everyone in the marketplace out there, and for those who are borrowing at or near their limit, it does mean that they may have to reduce their budget.
“It means buying property that’s different to what they originally envisaged and maybe looking at apartments or townhouses rather than a standalone house, if that’s what we’re looking at, or potentially buying into more affordable suburbs than those that might have been a few months ago.โ
Andrew Cocks โ Richardson & Wrench
Richardson & Wrench Managing Director Andrew Cocks said that while the 0.25 per cent increase to the cash rate was expected, Dr Lowe’s comments about future rises had caught some off-guard.
“Whilst there was no surprise that there was an increase, the statements made by the RBA Governor have caused the financial markets to predict that the rate rise process still has some way to go, with many economists now predicting that there may be a further two similar interest rate increases over the next few months,” he said.
He said that rate increases to date had had a clear impact on the property market.
“The rapid changes to interest rates over the last nine months have had two major impacts on the property market โ the most obvious being the necessary reversal in property values to bring them back to be more in line with long-term value trendline, with the second impact being the significant decline in the volume of property transactions with many prospective vendors sitting on their hands while they wait to see what the RBA will do, and how this will impact of the value of their property,” he said.
He predicted that the market would continue to see some volatility as the RBA tried to balance taming inflation with avoiding too much economic pain.
As there is every likelihood that the RBA will overshoot and need to ease interest rates at some stage over the next 12 months or so, itโs likely that weโll see higher levels of volatility throughout 2023.
T”he long line of increases is having an impact on the balance sheets of many Australians but the RBA has a lot more to focus on than just property prices and listing volumes,” Mr Cocks said.
“Governor Lowe stated today that the path to achieving a soft landing remains a narrow one but the sooner the RBA can get to its destination, the sooner it can get off the path.”
Mathew Tiller – LJ Hooker
LJ Hooker Groupโs Head of Research, Mathew Tiller said the RBAโs decision to lift interest rates for the ninth consecutive month was unlikely to surprise mortgage holders or flood the market with distressed listings.
He also said it was likely another 0.25 per cent rate will follow in March before CPI data is released in April.
While many mortgage holders will be coming off low fixed-term rates in the coming months, it is not expected to have a major impact on stock levels.
Mr Tiller said there may be a small rise of properties coming onto the market, however, strong employment figures will give people the confidence they will be able to make repayments.
โMortgage holders on low fixed loans have been saving for the past two years while everyone else has been paying higher rates, so it is likely they have a savings buffer,โ Mr Tiller said.
โPeople know higher interest rates have been coming and they would have been planning forward and budgeting rather than waiting until they cannot afford it. โ
Mr Tiller said agents had reported strong numbers inspecting homes over January, with a shortage of stock keeping sales constant over the summer.
A number of factors could have caused the spike in attendance at inspections over the holiday period, and auction volumes had also started to rise, with clearance rates of more than 60 per cent over the past few weeks.
โIt may also be people are window shopping in their area and looking at what prices are doing or if they are out there trying to pick the bottom of the market,โ he said.
โThe motivation will be to get in low and buy before anything changes towards the second half of the year when inflation has come under control.
โThe good news for sellers is that listings are down for the start of the year which means there is not much competition out there between properties, and while prices are softening the pace of decline has slowed.โ
Mr Tiller said while property prices had fallen it was important to remember they remain about 17 per cent higher than pre-Covid levels following unprecedented growth during 2021.
โLooking at the performance of sale values or prices over a longer time period puts the current decline into perspective,โ Mr Tiller said.
โIt may be the quickest or sharpest decline on record but in 2021 we had the highest monthly growth on record.
โPrices have fallen by 8.3 per cent from the peak of the market over eight months but that is off 25 per cent growth nationally, so there is a considerable way for them to fall to reach pre-Covid levels.โ
Nerida Conisbee – Ray White
Ray White Chief Economist Nerida Conisbee said todayโs interest rate rise came as no surprise given the recent December inflation figures.
She said it had been a stressful 12 months for mortgage holders with average mortgage repayments increasing by $1000 a month since the start of 2022.
โWith less cash to spend on other things, this is now slowing down the economy and we saw this most clearly in retail trade figures released last week,โ Ms Conisbee said.
โUnfortunately however, inflation is yet to slow and with it hitting a 30-year high of 7.8 per cent in December, it was no surprise that the Reserve Bank of Australia increased the cash rate by 0.25 per cent today.
โWhile this is unlikely to be the final rate rise, it is likely that the increases will stop soon as inflation comes down.โ
Cameron Kusher – PropTrack
PropTrack Director Economic Research Cameron Kusher said the cash rate now sat at its highest level since September 2012 and tipped it would rise again next month before pausing and potentially dropping towards the end of the year.
He said the โfastest and most significant tightening cycle in many decadesโ would result in further property price falls.
โWith borrowing costs continuing to rise and the subsequent reduction in borrowing capacities, property price falls are likely to continue and accelerate in 2023, with the more expensive cities likely to see the largest price falls,โ he said.
โNationally, we are forecasting prices to fall by a further 7 per cent to 10 per cent by the end of this year.
โThis forecast is based on the assumption that the cash rate will see a total increase of 50 basis points from its December 2022 level (3.1 per cent).
โWith the RBAโs hike of 25 basis points today, weโre expecting an additional rate rise of 25 basis points, or thereabouts, likely to follow next month.
โThereafter, we expect rates to remain on hold, with the potential for them to be reduced in late 2023 or early 2024.
โWe anticipate these further interest rates rises will push prices lower. However, a lower interest rate peak and earlier than expected interest rate cuts could ease price falls.โ
Gavan Ord – CPA Australia
CPA Australia Senior Manager Business Policy, Gavan Ord, said it was unlikely todayโs cash rate rise would be the last in 2023.
โItโs going to be a tough year for some businesses and households,โ he said.
Mr Ord said rising costs, higher interest rates, a skills shortage and economic uncertainty would continue, and he anticipates many businesses will โkeep feeling the pinchโ.
โThose on fixed incomes, coming off fixed interest rates or who have significant debts may face difficulty,โ he said.
โA CPA Australia poll in December found almost half of 1200 respondents were most worried about rising costs this year. A third put a recession in 2023 as their top fear and one in five said higher interest rates was their biggest concern.โ