Real Estate

Housing market is ‘in the RBA’s hands’ as key spring season kicks off

The housing market’s immediate fortunes and the depth of price falls are “in the Reserve Bank of Australia’s hands” as the peak spring selling season gets underway, experts say.

The RBA has delivered an unprecedented fourth double interest rate increase in a row but economists expect it may now slow down the pace of its aggressive rate rises.

PropTrack senior economist Eleanor Creagh said how high and how fast the cash rate rises will be key to determining housing market conditions, which have slowed in recent months.

“The level of interest rates will be a key factor of housing market conditions and the pace and depth of home price falls in the period ahead,” she said.

How will interest rates affect the market this Spring?

Ms Creagh said the RBA’s rapid rate rises have increased the cost of servicing a mortgage and reduced buyers’ borrowing capacities, while also weighing on consumer confdence and buyer sentiment.

“While the labour market is strong and unemployment is at levels last seen in the 1970s, consumer confdence has fallen sharply.

“There is still uncertainty around future borrowing costs, cost of living pressures and how far and how fast the RBA will eventually raise the cash rate.

“Those factors have seen housing market conditions shift off the exceptional levels seen last year and the strong pace seen earlier this year.”

Announcing a further 50 basis point rise in the cash rate to 2.35% on Tuesday, RBA governor Philip Lowe made it clear there will be more rate hikes as the central bank tries to bring down infation.

The RBA has now lifted rates by 225 basis points since May, taking the cash rate to its highest level since January 2015.

Economists at Australia’s four largest banks expect the cash rate to rise to at least 2.6% or 2.85%, and as high as 3.35%.

Economists at the Commonwealth Bank of Australia, the nation’s biggest mortgage lender, expect Tuesday’s 50 basis point hike to be the last one of that magnitude.

“The RBA have delivered an incredible amount of tightening in a very short space of time,” CBA’s head of Australian economics Gareth Aird said.

Mr Aird, who expects one or two further rate hikes of 25 basis points to take the cash rate to 2.6% or 2.85%, said CBA’s narrative on the housing front is quite simple.

“RBA policy decisions from here will drive the demand for credit, which will in turn infuence home price decisions,” he said.

“The Australian housing market is in the RBA’s hands.”

Rate hikes to determine extent of price falls

Ms Creagh said the fastest rise in the cash rate since 1994 has led to home prices falling across the country, with prices nationally now sitting 2.7% below their March peak.

“As borrowing capacities are constrained and buyers’ budgets shrink, the most expensive markets of Sydney and Melbourne are leading the price declines. Prices in Sydney are now below levels recorded in August last year.

“Tuesday’s rate hike will further increase borrowing costs and reduce maximum borrowing capacities, pushing property prices further down.”

Economists at the big four banks are forecasting peak-totrough home price falls of between 15% and 18% by the end of 2023, although CBA now expects the bottom will be reached mid-next year before prices gradually rise.

Property Outlook: Falling prices to continue into 2023

AMP chief economist Shane Oliver now expects the cash rate will peak at 2.85% with 25 basis point increases in October and December, before rate cuts start towards the end of next year.

“We continue to see average home prices falling 15-20% top to bottom and this is occurring earlier and faster than previously expected,” Dr Oliver said.

“A rise in the cash rate towards 4% as the money market is assuming would likely result in steeper falls in home prices.

“Market expectations for the cash rate to peak around 3.8% in the September quarter next year look too hawkish and if realised would likely plunge the economy into recession and push home prices down by 30% or so from their highs earlier this year.”

The latest PropTrack Property Market Outlook forecasts nationally prices will fall by up to 15% by the end of next year, but will still be higher than pre-pandemic levels after a 35.1% increase nationally between March 2020 and the peak in March 2022.

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