A leading analyst has revealed the impact a feared interest rate rise would have on Australia’s property markets, declaring “some cracks are already showing”.
The monthly measure of inflation for the year to May, released last week, hit four per cent, which was above expectations and marked the highest rate of the year so far.
“While the monthly CPI indicator isn’t as complete a measure as the quarterly inflation result, there is concern that inflation is back on the rise,” CoreLogic head of research Eliza Owen said.
The higher rate has sparked concern among economists and pundits that the Reserve Bank is now unlikely to slash the official cash rate anytime soon, as it had been tipped to do.
And Ms Owen said any sign that inflation is on the up again “could necessitate another increase in the Reserve Bank cash rate”.
“Another rate rise would slow housing demand,” she said. “And some cracks are already showing.”
Steve Mickenbecker, financial services group director at Canstar, believes the RBA will “surely” hike rates in August, which is a prediction echoed by Deutsche Bank.
Meanwhile, RateCity has urged borrowers to brace for possibly two increases by the end of the year.
The RBA’s target for inflation is two to three per cent, meaning there’s some way to go before CPI is sufficiently tamed.
Rapid run beginning to slow
In June, home prices at a national level rose 0.7 per cent, up eight per cent over the past 12 months, with some staggering results across the capital cities.
Property value growth in Perth has led the nation, up a whopping 23.6 per cent in the past year. That headline figure was followed by Brisbane’s year-on-year increase of 15.8 per cent and Adelaide’s annual jump of 15.4 per cent.
In Sydney, home prices are now 6.3 per cent higher than they were 12 months ago. Melbourne’s market has seen minimal change, with prices up modestly by 1.3 per cent year-on-year.
“There are some suggestions that demand is already weakening,” Ms Owen said.
“National home values were up 1.8 per cent in the June quarter, but this has slowed from a 3.3 per cent rise this time last year, when the market was rising off a lower base.”
Markets would likely cool further if the RBA was forced to lift interest rates in coming months, Ms Owen said.
At the moment, buyer demand is more likely to be found in cheaper markets, with the West Australian capital witnessing particularly strong momentum.
“It is estimated that Perth accounted for 32.4 per cent of the 0.7 per cent uplift in CoreLogic’s capital city home value index. Adelaide has also contributed more to the headline growth figure through June (14.2 per cent), up from 4.1 per cent a year ago.”
Should the RBA make an upwards move in August, monthly repayments on the average mortgage size would pass $4000.
“Not only is this further out of reach for prospective buyers, it would likely also represent a further blowout in the premium of holding a mortgage relative to renting,” Ms Owen said.
“The bigger that premium becomes, the weaker demand for purchases may become relative to renting, despite rent growth still sitting well above average.”
What the RBA board decides when it meets over coming months remains to be seen, but it has “expressed an extremely low tolerance for any further uplift in inflation”.
“However, there’s no guarantee of an August rate rise yet,” Ms Owen said.
“The Reserve Bank’s own deputy governor noted last week that it would be a ‘bad mistake’ to base the August rate decision on one result, highlighting that quarterly inflation figures, the labour market report and retail sales data could also feed into the rate decision.”
That’s a view shared by many others, including KPMG chief economist Brendan Rynne and HSBC’s chief numbers man Paul Bloxham.
The pair, along with most major banks, have revised their forecasts for the first rate cut from later this year to early to mid-2025.
Imbalance set to correct itself?
When interest rates began soaring from in May 2022, with a further 13 painful hikes to follow, expectations were that housing markets would suffer steep price falls.
While there was a several month period of decline, prices then settled in most parts of the country before surging once more.
“The housing market has been fairly resilient despite higher interest rates,” Ms Owen said.
From a price peak in May 2022 to the through in January 2023, values at a national level slid by 7.5 per cent. Since then, prices have risen consistently, now up 4.6 per cent since the RBA began waging its war on inflation.
“There are a few explanations for why housing values have continued to rise even as the cost of debt has risen, and borrowing capacity has eroded.”
Low supply and high buyer demand has underpinned price growth, meaning the impacts of rate rises haven’t flowed through to the market, generally speaking.
“In the June quarter, there were around 127,000 homes purchased, but only about 125,000 new listings added to the market for sale,” she said.
“As long as there are more people willing to purchase a home than sell, prices should theoretically continue to rise.”