No crash coming, but expect a slowdown: Undersupply will still drive demand for housing, even as rates rise, economists say. Dion Georgopoulos
The Reserve Bank’s 13th cash rate increase this cycle will dent the pace of price growth but not trigger a decline in housing prices in a vastly undersupplied market, economist said.
The RBA’s decision to raise the cash rate – as widely expected – by 0.25 percentage points to 4.35 per cent would likely prompt a pause in the pace of dwelling price growth as the country had seen after the first increases in May last year, but it would not last, PEXA chief economist Julie Toth said.
“We saw that happen at the beginning of the cycle, when prices did decline temporarily, but they rebounded quickly,” Ms Toth told The Australian Financial Review on Tuesday.
“We may see a welcome pause in price increases, but I doubt we’ll see another fall. On the flipside, we’ll probably see a burst of activity in refinancing.”
Australian Bureau of Statistics figures show the value of external refinancing commitments has fallen in four of the past six months, most recently declining 8.4 per cent in September.
Tuesday’s interest rate increase, the 13th in 18 months and the first after a four-month break, will dent the confidence of consumers already battling higher cost-of-living pressures.
Consumers have so far withstood the onslaught of higher borrowing costs, in part due to the large savings buffers built up during the pandemic and during the time of record-low borrowing costs when people refinanced at low rates. But it’s unclear how much of those savings buffers now remain.
If passed on in full, the extra 25 basis points would lift the monthly repayment cost of homeowners with a $500,000 mortgage up from the extra $1037 they have been paying since rates started rising last year, to $1116, according to comparison site Mozo.
Economist Louis Christopher said the cumulative weight of interest rate increases to date, including Tuesday’s quarter-percentage point move, would pull activity – and auction clearance rates – lower.
Cards off the table for Sydney, Melbourne
“People need to consider that accumulated effect of the multiple interest rate increases and not look at today’s change as just one single event,” Mr Christopher said.
“We also need to recall that monetary policy action takes time to impact the greater economy. The more recent indicators such as auction clearance rates are suggesting some caution in the marketplace and I think with this rate rise we’re going to see more caution.”
The probability had increased of a single-digit decline in national housing prices next year, with prices likely to fall in Sydney, Melbourne and Canberra next year, he said.
“All cards are off the table for Sydney and Melbourne,” he added.
“I have been concerned for Canberra for a while. I do not believe we’ll see a fall in housing prices in Perth – the momentum is very strong. At this stage, Brisbane is more in the Perth camp.”
In contrast, Tim Lawless, the research director for data provider Core Logic, said price declines were unlikely, even in Sydney and Melbourne, the two cities most at risk of a decline.
“We do expect this will drag confidence even lower,” Mr Lawless said.
“Consumer sentiment’s been at very pessimistic levels for nearly 18 months now. You have to expect there will be a negative effect on confidence, which has a correlation with housing activity.”
But while the decision could prompt an increase in listings of owners forced to sell and weaker demand from would-be buyers now able to borrow less than they could before, the rise was not enough to trigger price falls Mr Lawless said.
“I don’t think we’re at that stage yet,” he said.
“The still-burgeoning undersupply should keep a floor under housing to some extent. At least for the medium term this probably means more that price growth will continue to slow but remain positive rather than move into negative territory.”
CoreLogic figures last week showed national home value growth ticked up to 0.9 per cent in October from September’s 0.7 per cent, showing the market had recovered from the 7.5 per cent decline in value it suffered between May last year and January this year.
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