The Reserve Bank of Australia has increased the cash rate by 25 basis points at its March meeting, taking it to 3.6 per cent.
Announcing the decision, RBA Governor Philip Lowe repeated the board’s commitment to returning inflation to the 2 to 3 per cent range.
“The Board’s priority is to return inflation to target,” Dr Lowe said.
“High inflation makes life difficult for people and damages the functioning of the economy.
“And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment.”
While the latest CPI figures had shown a slowdown in inflation, prices were still increasing at a rapid rate in some areas of the economy.
“Services price inflation remains high, with strong demand for some services over the summer,” Dr Lowe said.
“Rents are increasing at the fastest rate in some years, with vacancy rates low in many parts of the country.”
In addition, global inflation figures remained very high, Dr Lowe said.
Dr Lowe said the bank was predicting inflation to return to its target range by 2025 and predicted that further rate rises would be required to do so.
“The Board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary,” he said.
Dr Lowe acknowledged that the RBA’s rate increases, as well as the decline in house prices, were dragging on household balance sheets.
“There is uncertainty around the timing and extent of the slowdown in household spending,” he said.
“Some 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.”
Geoff Lucas, The Agency
The Agency Managing Director and Group CEO Geoff Lucas said subject to ongoing high rates of inflation, which is expected to continue in the short term, he expects to see one or two more 25 basis point increases in the cash rate for a terminal rate between 3.85 and 4.10 per cent.
“While traditional data supports the case that real wages have fallen since the pandemic, other more contemporary measures, updated for how the workforce has changed – are indicating real wages are stronger than reports suggest,” he said.
“Additionally, as the peak of fixed rate roll offs won’t be occurring until July through to December – we have yet to see the majority of the impact on Australian mortgage holders. These factors help explain why consumption and inflation remains stronger in the face of ten consecutive interest rate increases.”
Mr Lucas said there had been a “bump” in metro area clearance rates of the past few weeks and while this has been encouraging he doesn’t think the market has reached the bottom in terms of prices.
“There are a number of factors that are contributing to the rise in clearance rates including low supply levels but it can also be attributed in some instances to buyers looking to deploy capital at their current approval levels,” he said.
“They now understand that their capacity to borrow is likely to be reduced on reassessment with each interest rate rise.
“I believe that there is more softness in the market ahead as inflation and the full impact of interest rate increases is felt.
“Notwithstanding the strong language in today’s statement that ‘the RBA will do what is necessary’, as consumers eventually become more comfortable that the terminal rate is approaching, and this cycle of increases is approaching its end, there will be improved sentiment, and therefore we believe a lift in transaction numbers.”
Mr Lucas said when the upward rates cycle paused, a sustained period of stability was likely and he tipped price headwinds would be met with strong immigration, particularly from India.
“Looking ahead, it has been it has been a ‘wild ride’ in the past three years and we are looking at a period of more stability with less volatility – a healthy development as real estate is a long-term asset class and households benefit from steady rates of growth facilitating a safe transactional environment,” he said.
Manos Findikakis, Agents’Agency
Agents’Agency Chief Executive Officer Manos Findikakis said today’s cash rate rise came as no surprise but potentially had more to do with the RBA’s fears over the global economy as opposed to what’s happening in Australia.
“They’re still maintaining the line that unemployment is very low, the job outlook is good and wages are rising but they’re still concerned about inflation,” he said.
“They’re probably more concerned about what’s happening internationally rather than locally and the knock-on effect that would have on our economy if other economies spiral out of control with regard to inflation.”
Mr Findikakis said the current property market had normalised and the number of buyers attending open homes had returned to balance.
He said the most common buyer concern right now was about their borrowing capacity.
“Plus the banks, our understanding of it, is that they’re putting in a larger margin for increased rates when they’re assessing for affordability,” Mr Findikakis said.
He said he doubted property prices would drop any further and up until this point they hadn’t noticed any distressed sales.
“We’ve seen a few investors, if they’re multiple owners, put their properties on the market, but, let’s be realistic, a lot of people have buffers in their equity,” Mr Findikakis said.
Thomas McGlynn, BresicWhitney
BresicWhitney CEO Thomas McGlynn said today’s rate rise was unlikely to negatively impact on market sentiment, which had risen over the past six months.
“The 10th interest rate rise is emblematic of the changes that have occurred over the last year to the economy, borrowing power and the subsequent shifts to have transpired in the industry,” he said.
“While it will tighten the economic side of the market and this remains a challenge to work through, it isn’t likely to have a significant impact on sentiment or intention. In fact, it’s the upcoming NSW State Election that’s more likely to be the driver of any larger change here.
“February confirmed the ‘meeting of minds’ that’s happened between buyers and sellers and there’s far higher levels of confidence and intention in the Sydney market than six months ago.
“Coupled with the first increase in median values according to CoreLogic, and our outlook of a further 5 – 10 per cent increase in listing values this month, the green shoots coming through are clear.”
Mr McGlynn said the real estate industry would need to welcome the changes the next six to 12 months would bring, without being too distracted by them.
“Maintaining a longer-term view of the market and, for example, moving away from the temptation to call the bottom of the cycle, will be beneficial,” he said.
“We’re focusing instead on thinking about the length of time we’ll spend in these current conditions and the overall shape of the path to normalisation.
“Our expectation is that it’ll follow a more U-shaped, not a V-shaped path, meaning we can expect a further six to 12 months before wider confidence returns.”
Nerida Conisbee, Ray White Group
Ray White Group Chief Economist Nerida Conisbee said the price increases recently seen across Australia may be short lived given the 10th consecutive rate hike and that more were forecast.
But she stressed that high levels of demand were still showing up in the group’s auction data, particularly in relation to the number of active bidders at auction.
“The number of people actively bidding at auction is, in my opinion, a much better one than clearance rates,” she said.
“If you are putting up your hand to buy a property, it almost certainly shows that you are ready to buy.”
In February, auction clearance rates hit 2.8 bidders per auction, Ms Conisbee said.
“It was the highest level we have seen since April last year, a month before interest rates increases started,” she said.
“The increases are consistent across capital cities where a lot of auction activity takes place.
“In Sydney, average bidders reached 2.7, a significant increase from the low experienced in June last year of 2.1.
“Melbourne and Brisbane hit lows in November last year but have also picked up considerably.
“Melbourne is now at 2.8 bidders (2.2 in November) while Brisbane is at 3.4 bidders (2.1 in November).”
Ms Consibee questioned whether the level of auction activity would continue given rates were expected to rise further and many fixed rates were due to end.
“On the other hand, Australia’s population growth is increasing by 300,000 people per annum, building approvals are falling, fewer homes are being completed and new listings are down 13 per cent,” she said.
“It will certainly be an interesting market to watch over the next few months.”
Mathew Tiller, LJ Hooker
LJ Hooker Group’s Head of Research, Mathew Tiller, said sellers had been holding back on listing their properties and the RBA’s latest rate rise would likely keep listings tight throughout autumn.
Latest CoreLogic figures show property listings are more than 15 per cent down on a year ago and still well below average levels.
“Employment remains strong and wage growth has improved slightly – so many people are content to sit out of the current market and put their plans to move on hold, but there are those who may be contemplating downsizing their mortgage or looking for something more affordable and this could be the right motivation,” Mr Tiller said.
“The lack of choice is putting pressure on buyers and this is helping to lift prices in some areas, and while buyer competition is currently a long way from the ‘FOMO’ levels experienced in 2021, it is definitely higher than the end of last year.
“Vendor expectations have become more realistic and more people are willing to meet the market.”
Mr Tiller said investor enquiry was also on the rise due to attractive rental growth, although they are yet to jump back into the market and will be dependent on whether they can afford higher interest rates.
“Those tenants who are in a position to buy will be trying to get out of the rental market and this will also add to the pool of active purchasers throughout autumn,” Mr Tiller said.
Uncertainty remains about what will happen when a large number of fixed-term mortgages begin to expire later this year.
Mr Tiller said the market would be able to cope with increased listings whether due to people exiting their mortgages or just due to normal increases.
“People are working through their financial situation now either by talking with their bank or finding another lender,” he said.
“It is likely banks will be doing everything they can to keep the mortgage holder as a customer and will be more willing to renegotiate or provide a repayment holiday rather than repossessing a home.”
Eleanor Creagh, PropTrack
PropTrack Senior Economist Eleanor Creagh said previous interest rate rises had already quickly rebalanced the housing market and were now sitting at 3.9 per cent below their March 2022 peak, despite bouncing 0.18 per cent in February.
She said borrowing capacities had dropped and this signalled further price drops could be on the way.
“Now the cash rate is sitting at 3.60 per cent after 350 basis points of tightening to date, maximum borrowing capacities have dropped by around 30 per cent,” Ms Creagh said.
“The significant reduction in borrowing capacities implies further price falls.
“If we see an increase in stock levels in the coming months, that will remove a pillar of support for home prices, and together with the downwards pressure from rate rises, weigh on prices over the next few months.”
But Ms Creagh said the peak in the interest rate tightening cycle was nearing and if the RBA hit pause later this year, property prices would likely start to stabilise as buyers would have greater certainty over borrowing capacity and mortgage serviceability.
“The downward pressure from rate rises will also be countered to a degree by positive demand effects that stem from tight rental markets and rental price pressures, rebounding foreign migration, stronger wages growth, and over the long run, housing supply pressures,” she said.
“Sellers in market now are benefitting from low competition with other vendors, as buyers vie for available stock. The constrained level of properties available for sale has concentrated buyer demand and is “putting a floor” under home prices to a degree.
“Tight supply was a contributor to the rise in home prices throughout February, but with additional rate rises on the horizon, borrowing costs will continue to increase and maximum borrowing capacities will be further reduced, with home prices likely to continue declining as interest rates move higher.”
