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Reserve bank lifts interest rates 0.25 per cent

With inflation at its highest level in more than three decades, the Reserve Bank of Australia has announced its seventh consecutive rate rise of the year, bringing the current official cash rate to 2.85 per cent.

In their second last meeting of the year, the RBA increased the cash rate 25 basis points, while also raising the interest rate on Exchange Settlement balances by 25 basis points to 2.75 per cent.

It marked the first time in 12 years that the RBA had increased the cash rate on Melbourne Cup Day, with the last November rate increase taking place in 2010.

Mincing few words about how problematic inflation had become, RBA Governor Dr Philip Lowe noted it was simply “too high”.

“Over the year to September, the CPI inflation rate was 7.3 per cent, the highest it has been in more than three decades,” he said.

“Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role. 

“Returning inflation to target requires a more sustainable balance between demand and supply.”

It looks like there will be little reprieve from rising inflation in the period ahead, with the central bank now predicting it will peak at 8 per cent later this year, before declining next year.

“Medium-term inflation expectations remain well anchored, and it is important that this remains the case,” Dr Lowe said.

“The Bank’s central forecast is for CPI inflation to be around 4.75 per cent over 2023 and a little above 3 per cent over 2024.

In general, Dr Lowe said the Australian economy continued to grow “solidly”, with national income being boosted by a record level of the terms of trade.

“Economic growth is expected to moderate over the year ahead as the global economy slows, the bounce-back in spending on services runs its course, and growth in household consumption slows due to tighter financial conditions,” he said. 

“The Bank’s central forecast for GDP growth has been revised down a little, with growth of around 3 per cent expected this year and 1.5 per cent in 2023 and 2024.”

In terms of the labour market, Dr Lowe said it remained “very tight” with many firms having difficulty hiring workers. 

The unemployment rate was steady at 3.5 per cent in September, around the lowest rate in almost 50 years. 

“Job vacancies and job ads are both at very high levels, although employment growth has slowed over recent months as spare capacity in the labour market has been absorbed,” Dr Lowe said. 

“The central forecast is for the unemployment rate to remain around its current level over the months ahead, but to increase gradually to a little above 4 per cent in 2024 as economic growth slows.”

Meanwhile, the RBA is also keeping a watchful eye on wages growth.

Although lower than many other advanced economies, wages growth is continuing to pick up from the low rates of recent years, and further increases are expected due to the tight labour market and higher inflation. 

“Given the importance of avoiding a prices-wages spiral, the Board will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms in the period ahead,” Dr Lowe said.

Dr Lowe reiterated the RBA Board’s aim to return inflation to the 2–3 per cent range over time, while also keeping the economy on an even keel, but conceded the path to achieving this remained “narrow” and “clouded in uncertainty”. 

Contributing to that uncertainty is a deteriorating outlook for the global economy.

The full effects of this year’s rate rises also remain to be seen and the RBA is yet to have insight into how household spending in Australia responds to the tighter financial conditions. 

“The Board recognises that monetary policy operates with a lag and that the full effect of the increase in interest rates is yet to be felt in mortgage payments,” Dr Lowe said.

“Higher interest rates and higher inflation are putting pressure on the budgets of many households. 

“Consumer confidence has also fallen and housing prices have been declining following the earlier large increases. 

“Working in the other direction, people are finding jobs, gaining more hours of work and receiving higher wages. 

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

Explaining the seven consecutive cash rate rises of 2022 were “necessary”, Dr Lowe said the aim was to establish a more sustainable balance of demand and supply in the Australian economy to help return inflation to target. 

“The Board expects to increase interest rates further over the period ahead,” he warned. 

“It is closely monitoring the global economy, household spending and wage and price-setting behaviour. 

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

“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”

Geoff Lucas – The Agency

Chief Executive Officer and Managing Director of The Agency Geoff Lucas maintained the terminal rate would be at or close to 3.1 per cent.

He said the RBA started lifting rates when the cash rate was at 0.1 per cent and the banks’ assessment buffer of 3 per cent combined to reach the point of affordability.

Mr Lucas said the volatility in the property market would also level out in 2023, and there would not be the dramatic price increases or falls of recent times.

“Volatility has been the result of large swings in interest rates,” he said.

“First of all, on the downside as interest rates reduced quickly to those emergency levels, and more recently, in the past six months, moving up the other way. 

“We’ve seen a commensurate volatility in house prices, which we normally don’t see over the long term.

“I think we’re entering an extended period now of far less volatility, because interest rates will not be moving by the same quantum they have over the past three to four years.” 

Mr Lucas said last week’s Federal Budget had also shocked many people, with the government warning energy prices would rise more than 50 per cent over the next two years.

Mr Lucas said that would have an impact on demand, as would the government’s tight fiscal policy.

He said it would also be prudent to watch an expected “mortgage cliff” between July and December next year, which is when the greatest percentage of fixed to variable mortgage roll-offs were due to occur.

“That will contribute to softness (in the market), however increases in immigration will continue and contribute to affirming,” Mr Lucas said.

“So all of those things taken into account and reduced volatility in interest rates will lead to less volatility in house prices.

“The impact of that is a safer environment for Australian families transacting and moving house prices.”

Manos Findikakis – Agents’Agency

Agents’Agency Chief Executive Officer Manos Findikakis said the Reserve Bank had taken a “measured approach” with today’s rate rise and the six earlier increases had resulted in the desired effect.

“The continued interest rate rises over the past six months has had the effect of putting pressure on, or combating inflation, and putting pressure on the confidence in the market,” he said.

“They don’t want to go too hard because then it will really slow, so I think they’ve taken a measured approach.”

Mr Findikakis said while there was talk of a recession in 2024, he said Australia was significantly better positioned than other world economies and should one eventuate, we would have a much “softer landing”.

Prior to today’s cash rate decision, some experts had suggested a 0.5 per cent increase could have occurred, but Mr Findikakis correctly predicted 0.25 per cent and said a string of East Coast natural disasters could also have affected the RBA’s decision.

He said the steady rate increases allowed house hunters time to reassess their property needs and recalculate how much they could borrow.

“We’re still in a really good spot, we’re not seeing people who bought at the peak selling,” Mr Findikakis said.

“Employment is also still very strong.”

Nigel O’Neil – Barry Plant Group

In light of rising inflation, Barry Plant Group Chief Executive Officer Nigel O’Neil said today’s 25 basis point cash rate increase was less than he expected.

Noting New Zealand was in a similar position in terms of inflation, he said their central bank had started increasing rates far earlier and currently have the cash rate sitting at 3.5 per cent, which is 0.65 per cent higher than Australia.

“As hard as a 0.5 per cent cash rate increase might have been today, it would have helped tame the inflation beast,” he said.

Looking to the future, Mr O’Neil said a 0.5 per cent increase was now highly likely in December when the RBA board comes together for its final meeting of the year, before returning again in February 2023.

“At that stage they will have a lot more information about how effective the cash rate increases of 2022 have been,” he said.

But he said the RBA had a major challenge on their hands.

While rising interest rates and an increased cost of living are now affecting discretionary expenditure, including the property market, Mr O’Neil explained the real challenge lay in the fact supply issues were driving the price of essentials higher.

And cash rate increases were unlikely to impact this any time soon.

“They want us to tighten the purse strings,” Mr O’Neil said.

“The reality is the more Australians have to spend on a mortgage the less they spend elsewhere, which affects general confidence across the economy.”

Mr O’Neil noted rising interest rates had already had the desired effect of dampening property prices. 

“The market is slowing and will continue to do so,” he said.

While that might not be the news some vendors want to hear, he said elsewhere it created opportunity, particularly for first home buyers hoping to get a foot on the rung of the property ladder.   

Andrew Cocks – Richardson & Wrench

Richardson & Wrench Managing Director Andrew Cocks said today’s 0.25 per cent cash rate hike was indicative of RBA having to “tiptoe through a minefield of conflicting interests”.

“With the very passive Federal Government budget now behind us and ready to be consigned to history as one of the least interesting budgets in recent memory, it’s been left to the RBA to continue to do the heavy lifting in relation to realigning the financial markets away from the impacts of Covid and bringing inflation back under control,” he said.

“A looming major global downturn with recessions likely in the majority of our major trading partners will ultimately have a significant impact on the rampaging inflation that is currently being experienced around the world.

“However, the RBA has to act on the here and now, so continuing its move towards more normal interest rate settings is essential.”

Mr Cocks noted the current cycle of interest rate increases would result in borrowing capacity being reduced, higher mortgage payments for existing borrowers and declining property prices. 

“The adjustments that commenced in the Sydney and Melbourne markets are now gradually spreading to the rest of the national property market with most major cities as well as some buoyant regional markets starting to see declines in their markets, both in terms of volumes and prices. 

“New listing volumes are down, auction volumes are down and auction clearance rates are similarly down. Time on market and discounting levels are both up.

“However, all of these impacts were expected and to date the change across the Australian real estate market has been orderly with the adjustments experienced to date still well below the increases that occurred since 2020.”

Stating there was clearly a lot of uncertainty and nervousness in economies around the world, Mr Cocks said the fact that global sharemarkets are now regularly experiencing daily fluctuations of well over 1 per cent in both directions was an indication of the jitters in investor confidence at the moment. 

“But despite all of the noise that exists in the media commentary, the Australian economy will continue to perform better than most advanced countries – strong employment, high levels of overseas migration, solid GDP result and per capita wealth being amongst the highest in the world,” he said.

“All of these factors will combine to minimise the impact of the current downturns compared to other markets and will ensure that when the decline phase ends, the Australian real estate market will continue to perform strongly. 

“There is no doubt there will be pain along the way, however this cycle presents opportunities for the real estate industry to continue to assist clients to achieve the best possible outcomes throughout the fluctuations in the market.”

Thomas McGlynn – BresicWhitney

BresicWhitney Chief Executive Officer Thomas McGlynn said the recently updated CPI inflation figures, combined with the RBA’s decision today indicated there would be further interest rate rises this year and well into 2024.

He said the “bullish” interest rate hikes of earlier this year had slowed but there was still uncertainty in the property market.

“I think unfortunately, what that does is it actually creates more doubt in buyers and sellers’ minds with relation to when there is going to be some form of stability,” Mr McGlynn said.

“And given the last rate rise was lower than what we’d been experiencing, it almost lulled everyone into a false sense of security that there was some sense of normality returning to the market.

“The fact that we’ve gone 0.25 per cent again today probably shows there’s going to be consecutive rate rises well into early next year.”

Mr McGlynn said the current property market was “unusual” and came closely behind the Banking Royal Commission and the Covid boom.

“If you look at auction volumes, not only across Sydney but across Australia, they’re enormously down,” he said.

“The auction volumes for October 2021 were almost 40 per cent higher than the auction volumes in October 2022.

“That clearly says there’s not a lot of property coming on the market, but on the flip side, we haven’t really seen a dramatic change in the amount of people that are inspecting properties.”

Mr McGlynn said buyer and seller confidence would return once there were consecutive periods without rate rises, even if there were not cuts.

“As long as there is some certainty, so buyers and sellers could transact in the same market, then we would actually see a relatively healthy property market return,” he said.

Nerida Conisbee – Ray White Chief Economist

Ray White Chief Economist Nerida Conisbee said there were no surprises in the RBA’s announcement of a 25 basis cash rate hike today. 

With September data indicating quarterly inflation was now at its highest point in 30 years, she said price growth was not occurring at the same rate in every city. 

“Perth prices actually went backwards in the September quarter as a result of a rebate on electricity bills during the time,” Ms Conisbee said.

“In Adelaide, price growth is strongest, due to soaring energy prices. 

“Across Australia, construction costs continue to be problematic, a flow on to housing supply that is already being felt by renters and will extend to home buyers over coming years.”

Meanwhile, she explained treading the fine line between taming that inflation and avoiding a recession remained a challenge. 

“How quickly conditions change to the negative is now showing up in the UK,” she explained.

“Like Australia, boom time conditions followed the end of the pandemic. 

“But then prices began soaring off the back of higher demand but more particularly, conditions that are not impacted by rate rises such as the war in Ukraine and blocked supply chains. 

“The cash rate in the UK is now 2.25 per cent, inflation is at 8.8 per cent. Interest rate rises have yet to kill off inflation, but have killed the economy. 

“The Bank of England has stated that the economy is now in recession.”

Ms Conisbee said Australia had taken a more proactive approach, moving more quickly to increase the cash rate.

She said inflation remained lower than the UK but recession was still a risk. 

“Already, companies that were on hiring sprees less than 12 months ago are cutting staff. 

“Government debt is at a record high and there is less to help those most adversely affected. 

“The US dollar continues to soar, increasing the costs of exports. It is easy to go down a deep dark hole when considering the outlook. Can Australia avoid a recession?” 

On a more positive note, Ms Conisbee said historically Australia had been remarkably successful at avoiding recessions. 

“Prior to the pandemic driven recession, Australia did not have a recession in 30 years,” she said. 

“We were even able to avoid the ‘Great Recession’ between 2007 and 2009, mainly due to the iron ore boom that happened at the same time. 

“Added to this has been population growth that has been above many other countries, close links to China, strong growth in our services economy and a boom in construction. 

“Some of what has led to Australia being more recession proof than other countries hasn’t really changed,” Ms Conisbee stated. 

Iron ore is now being backed by soaring demand for green energy minerals.

Australia remains desirable as a place to move to with migration capped only by how many people we allow to move here, rather than a shortage of demand. 

However, she noted Australia’s reliance on China for economic growth was more complicated. 

“We are still closely linked to China but COVID lockdowns are still a reality in that country. 

“Next year, economic growth is expected to be just 2.8 per cent in China, lower than what was experienced last year in Australia and certainly a lot slower than what China has been experiencing longer term. 

“Furthermore, our relationship with China is currently far more complex than it has been for many years. 

“This relationship with China then has flow-on impacts to our services sector, particularly education which remains one of our top exports.”

Ms Conisbee noted the number of overseas students from China is now at its lowest level in a decade. 

“More positively, the number of students from India is now higher than those from China in South Australia, Western Australia and Tasmania,” she reflected. 

“Finally, we are going to see less economic growth from construction over the next 12 months. 

“Dwelling approvals are now down 10 per cent from last year and many projects have been delayed due to challenges in the construction sector. 

“While this has a flow-on to economic growth, it also impacts rents and prices. 

“It is getting harder to find a home to buy or rent and this is not going to change any time soon.” 

Ms Conisbee said it was too early to tell whether Australia could avoid a recession but if China bounces back, migration levels push upwards and the education sector starts to return to pre-pandemic conditions, we may once again be a global outlier. 

“For now however, cost of living increases look like being a challenge for most of us,” she stated. 

Mathew Tiller – LJ Hooker

LJ Hooker Head of Research Mathew Tiller said mortgage holders feeling the strain of the higher cost of living may opt to downsize, but otherwise today’s interest rate rise was not expected to significantly change current market conditions.

“We don’t expect to see a large wave of listings before the end of the year, given employment markets are strong and everyone has been pencilling higher interest rates into their household budget, so today’s announcement won’t be a surprise,” Mr Tiller said.

He said in Sydney, clearance rates had hovered around the 60 per cent mark for the past month and this showed properties were still transacting, with a base level of demand keeping the market moving.

“After such a strong period of high turnover, a more ‘normal’ rate of activity feels very slow but sales remain above the long-term average,” Mr Tiller said.

“Vendors who have flexible price expectations, rather than setting a price based on what was being achieved a year ago, are doing quite well. 

“Those who have been outpriced from the market over the past 18-months have been sitting on the sidelines. These buyers are seeing good value at the moment and purchasing if they are in a position to do so.”

Mr Tiller said homeowners had a short window left to sell their property before the end of the year. 

With median days on market at 35 days, sellers looking to transact prior to Christmans need to be listed and open for inspection by November 19, Mr Tiller advised.

He said LJ Hooker’s appraisal rate had lifted 3 per cent in the third quarter.

“New listings coming onto the overall market for sale are currently about 17 per cent lower than this time last year, meaning it has been a very slow start to spring,” Mr Tiller said.

“There is no sign there will be a big surge in listings leading up to the end of the year, meaning those who are looking to sell will have a ‘captive audience’.”

Effie Zahos – Canstar

Canstar Editor Effie Zahos said before today’s rate rise, the cash rate had already risen 2.5 per cent this year, which is equivalent to the serviceability buffer banks applied to loan applications a year ago.

She said mortgage holders that secured a loan before October 2021 would likely be feeling the pinch more than others.

“Every rate hike from this month onwards will be a direct hit to your household’s budget bottom line,” she said. 

“The serviceability buffer that banks would have assessed you on has now been fully absorbed by the rate hikes.”

Ms Zahos said each repayment from now on had not been factored into a household’s serviceability.

She said if the RBA added another 0.25 per cent increase in December, the cash rate could be at 3.1 per cent by the end of the year.

“This will add $889 to monthly repayments on a $500,000 loan of 30 years since the first rate rise this year in May,” Ms Zahos said.

“If you’ve got a $1 million debt this figure blows out to $1779.”

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Kylie Dulhunty

Kylie Dulhunty is the Editor at Elite Agent.

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”.