Not hard: Housing markets will soften next year as more properties come up for sale. Dion Georgopoulos
Australia’s main housing markets will soften next year even though the Reserve Bank of Australia is likely to hold the benchmark lending rate at 4.35 per cent, economists and housing market leaders said after the central bank left the cash rate unchanged at its last meeting for 2023.
The RBA announced its decision to hold rates with a statement that higher borrowing costs were already working to curb demand, striking a more relaxed tone than observers took from governor Michele Bullock’s last address last month, Barrenjoey chief economist Jo Masters said.
But while the widely expected decision to keep the key lending rate unchanged reinforced the idea that the RBA was done lifting rates, it was not likely to lower them until towards the end of next year, meaning subdued demand for housing would continue, Ms Masters said.
Prices would not fall, but the overall rate of growth would weaken.
“Typically, we focus a lot on interest rates and borrowing capacity as they are the key driver of demand in the housing market. But there’s been another really important element going on in this cycle,” Ms Masters told The Australian Financial Review.
“Supply is again dominating the story. As supply lifts but interest rates hold at these levels it wouldn’t surprise me if you start to get a bit of softening coming through.”
Ms Bullock did not rule out further increases on Tuesday and economists said key for the RBA would be the December-quarter inflation figures, that would only be released next month, in deciding whether to build on the 13 interest-rate rises it has made since May last year.
Data from comparison site Mozo shows a borrower with a $500,000 variable-rate mortgage will now be paying $3480 a month, $1104 more than before the RBA started hiking rates and $13,243 a year more in total.
Some economists still expect a further increase.
“The RBA will have a new board when it next meets in February,” Oxford Economics Australia head of macroeconomic forecasting Sean Langcake said.
“The new board’s reaction function is an additional source of uncertainty, but there is almost no scope for it to be more dovish than the current one, and any hint of underlying inflation increasing or even failing to slow in Q4 will likely trigger another rate hike in February.”
The Agency chief executive Geoff Lucas said borrowing costs were unlikely to come down anytime soon, but that this would bring in a period of stability after “unprecedented price volatility” over the past four years.
“We expect higher rates for longer, which will mean subdued price activity for the majority of the residential real estate market with minor gains only in 2024 and falls in some areas,” Mr Lucas said after Tuesday’s decision.
Challenging rental markets
“Higher interest rates for longer will see more investment properties come to market, as investors seek higher cash returns,” he said. “This will create an opportunity for more first home buyers in 2024, especially as rental markets become more challenging.”
Economist Louis Christopher, the managing director of consultancy SQM Research – who predicts a capital city average housing price movement next year between -1 per cent and 3 per cent as Sydney and Melbourne are likely to suffer declines – said another rate rise could not be ruled out.
But Mr Christopher also said the RBA had flagged economic disparities within the community, pointing out that while many people had been affected by higher borrowing costs, others – particularly those with savings and housing wealth – were benefiting from them.
“The outlook for household consumption also remains uncertain, with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income,” the RBA said.
Previous statements had linked migration to rising demand for housing, but this one did not, Mr Christopher said.
“They’re widening the conversation,” he said. “They’re right to do that. What is their point? It’s to explain why the economy has done better than expected, to explain why the housing market has done better than expected.”
(Fin Review – December 2023) If you would like assistance with a home loan health check, purchasing property or refinancing, or to discuss any other lending needs, please do not hesitate to contact Geoff.
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