Outsized rate rise to steepen property downturn: Bluestone

Bluestone consultant economist Andrew Wilson has cautioned that the Reserve Bank of Australia’s (RBA) shock 50-bp rate hike this week will impact housing markets in the short term.

The rate movement, which followed May’s increase of 25 bps, was the largest since February 2000 and the second highest on record behind the 0.75 per cent increase that occurred in August 1994.

“The RBA has clearly decided to go early and go hard with rate rises in an attempt to control the highest inflation in decades,” Dr Wilson said.

“The policy aim for sharply higher rates is to reduce demand in the economy and dampen inflation, however the clear risk is that reduced demand will lead to higher unemployment setting the scene for a hard landing – a significant economic downturn.”

However, he sees the economy as well positioned for higher rates, with record low unemployment, signs of rising wages, high savings levels and the wealth effect from the recent surge in house prices.

The serviceability buffer that requires banks to test new borrowers’ ability to meet repayments at 3 percentage points above home loan product rates, is also expected to offset the impact of higher rates.

But in the short term, housing markets will be hit by what Dr Wilson has called the “fear factor”, with predictions of house price crashes and uncertainty around rates and the economy likely to freeze buyers and seller sentiment.

“The usually quieter winter selling season will be exacerbated this year by failing confidence and the fear factor resulting in likely continued downward pressure on home prices with non-discretionary sellers just having to accept what the market offers,” he said.

“The fear of missing out energy that strongly activated markets last year has now reversed to the fear of being involved.”

Expectations of higher rates have already weighed on the property market, as PropTrack economist Paul Ryan has noted, with prospective buyers now seeing their borrowing power constrained.

Australian house price growth has had its fastest slowdown in 33 years – with the annual rate across capital cities sitting at around 14 per cent. Six months earlier, there had been an average annual price growth rate of around 24 per cent.

Financial markets have priced in a cash rate 2 percentage points higher by the end of 2022, which Mr Ryan has estimated would raise mortgage repayments by another 24 per cent.

Similarly, CoreLogic has estimated that as banks have begun to pass on the 50-bp rate hike, the average variable interest rate for a new owner-occupier loan is now at 3.16 per cent.

The cumulative 75-bp increase from May and June will add around $200 per month in additional repayments on a $500,000 mortgage, compared with home loan rates in April.

However Dr Wilson commented that demand for housing is likely to remain ahead of supply in most capitals, with borders now open. Migrants and international student numbers are expected to rise, while investors are tipped to be lured in by low vacancy rates, and skyrocketing rents.

Housing demand is also expected to be fuelled by government grants and support for first home buyers, including the Labor Party’s shared equity program, the Help To Buy scheme, which was promised during the election.

Further, recent underbuilding – particularly for apartments, will keep demand well below supply, Dr Wilson stated.

Consumers could also be in for a long and tough haul.

“The question is how high do rates have to rise until inflation eases – particularly given the impact of uncontrollable outside forces notably record oil prices?” Dr Wilson stated.

“Higher rates over time will diminish the current offsets resulting in harder times for households.”

Following the RBA’s move on Tuesday (7 June), economists from ANZ, CBA and Westpac all predicted that the RBA would maintain its fierce attack strategy for inflation and repeat its 50-bp rate hike in either July or August.

The major banks swiftly moved to match the rate rise on Wednesday (8 June).

[Related: RBA tipped to repeat 50-bp hike]