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Surging inflation to eat into housing market: CoreLogic

Amid a peak in inflation and a looming cash rate rise, mortgage demand and house prices are tipped to slide earlier than expected.

Three of the big four banks have now predicted that the Reserve Bank of Australia (RBA) will raise the cash rate on Tuesday (3 May) at its monetary policy meeting, after new data revealed inflation is now at its highest since the GST was introduced in 2000.

The figures from the Australian Bureau of Statistics (ABS) showed annual inflation reached 5.1 per cent in the March quarter, while the trimmed mean, the Reserve Bank of Australia’s (RBA) preferred measure for underlying inflation, grew to 3.7 per cent.

The RBA has previously signalled that it would only raise the cash rate from its current record low of 0.1 per cent when it was convinced that its target range of 2-3 per cent annual inflation could be sustained – which would require annual wages growth above 3 per cent.


Earlier in April, RBA governor Philip Lowe confirmed the ABS inflation data, alongside a wage price index update that is due on 18 May, would be key to determining the path of the cash rate.

But given the current state of inflation, a number of economists now believe the RBA will not wait for wages data later in May, to make a move.

CoreLogic head of research Eliza Owen commented that with a rate rise to happen soon, there will be effects on the property market.

“As we’ve noted in previous research, looking at the data historically suggests an inverse relationship between cash rate movements and property price movements,” Ms Owen said.

“New demand for mortgages are expected to decline against a lift in the cash rate, adding further downwards pressure on the rate of the housing price growth and prices later this year.”

There is already downward pressure on property prices, with an analysis from Ms Owen and CoreLogic Australia research director Tim Lawless listing contributors: rises in supply on market and fixed mortgage rates, affordability constraints, and lower consumer sentiment.

Property prices have started to slip across Sydney and Melbourne, down 0.2 per cent and 0.1 per cent respectively in March. Preliminary readings from CoreLogic’s Home Value Index have indicated house prices across the two cities continued to decline in April.

A rate hike could trigger a sooner-than-expected fall in prices outside of Sydney and Melbourne, the CoreLogic note warned.

The RBA has recently predicted that a 2 percentage point rise in interest rates over the next two years could see house prices fall by 15 per cent.

Mr Lawless commented that a 15 per cent decline would take prices back to levels similar to March 2021, but the impacts will differ between cities.

“In markets where housing values have been rising faster, such as Brisbane and Adelaide, a 15 per cent decline would take housing values back to July and August 2021 levels respectively,” Mr Lawless said.

“While in Melbourne, a 15 per cent drop could see values at a similar level as May 2017, or in the case of Perth, back to June 2009 levels.”

Borrowers expected to stick out higher rates

CoreLogic also does not expect a material rise in distressed listings in the market, due to unemployment being set to a trend below 4 per cent.

Mr Lawless expects a “substantial rise in wages growth” amid low unemployment, which he believes will allow higher-risk borrowers to maintain their repayments.

Borrowers have also been assessed under higher serviceability buffer rates since November.

“The RBA has recently noted in their latest financial stability review the median repayment buffer would reduce back to 21 months of rescheduled repayments in February 2022, up from 10 months at the start of the pandemic,” Mr Lawless stated.

“With a two-percentage point rise in interest rates, the median repayment buffer would reduce back to 19 months, which is still substantial. With the median household well ahead of their mortgage repayments, the risk of households falling behind on their mortgage repayments is reduced.”

Further, RBA data showed non-performing housing loans comprised only 0.9 per cent of the mortgage portfolio at the end of 2021, below pre-COVID levels.

Almost all borrowers who took advantage of lender provision during the pandemic are also back in line with their repayment schedule.

“Such low numbers imply borrowers are entering a period of rising interest rates from a rising rates from a relatively strong foundation,” Mr Lawless said.

[Related: ‘No choice’ for RBA: Industry tips May rate hike]

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