The negative impact of rising interest rates on Australian house prices, household spending and the volume of housing investment could hurt consumer confidence, analysts and economists say. and lead to an economic downturn.
Reserve Bank of Australia raises interest rates for the third time in a row on Tuesday.
Joining central banks around the world, it raised the cash rate by 50 basis points to 1.35% after two previous rate hikes this year of 25 and 50 basis points, respectively. as the RBA tries to control inflation.
Anticipating a 15% to 20% decline in house prices in capital cities by 2023, AMP Australia Senior Economist Diana Mousina told CNBC’s “Street Signs” on Tuesday that the scale of the drop That reduction would be a “huge blow” to households.
“Over the decades in Australia we’ve seen some minor tweaks, but that [15%-20%] It’s going to be a pretty good fall,” she said.
“Obviously we’ve had a very big house price run over the last two and a half years of the pandemic because we’ve had a strong housing market, demand is also very strong for parts of Australia.”
“It will only have a slight effect on households … because the wealth effect comes in when house prices fall.”
RBC Capital Markets Chief Economist Su-Lin Ong told “Asian street signs“She was expecting a 19% peak-to-trough drop in housing prices and it could deal a ‘reasonably significant’ blow to consumer confidence.
But she also said these predicted price drops are smaller than the nearly 40% increase in home prices in the three years since 2019.
That 40% growth – mainly in big cities – in the three years since 2019 is outpacing other boom periods, including the recent five-year period between 2012 and 2017 when house prices up to 50% in places like Sydney and Melbourne, according to property data providers like Corelogic.
This year’s rate hike marks the first rate hike in 11 years, and more are expected to happen. Economists predict that the cash rate could rise to anywhere between 2.5% and 2.85%.
Home prices fell for the first time in February of this year after a massive increase because of the pandemic, and home prices rose more strongly than apartment prices.
Considering inflation is likely to remain high for some time and interest rates are expected to rise significantly in response, it is likely that the rate at which home values decline will continue to accelerate…
Heart has no law
Research director, Corelogic
House prices have risen rapidly over the past three years amid the ultra-low interest rates maintained by the RBA in its efforts to ease the economic downturn of the pandemic. Low home-buying rates have spurred home purchases, mainly among Australian residents and first-time homebuyers, as opposed to overseas investors or buyers.
But all of that is now changing as rates start to rise.
The national auction clearance rate and the number of auctions – measures of the buoyancy of the Australian housing market – have begun to decline.
According to Corelogic, there were fewer auctions in the past week than at the same time last year. Only 55% of those listed were successful compared with 72% in the same period last year, the data showed.
The Reserve Bank of Australia raised the cash rate by 50 basis points to 1.35% in July 2022, marking a 125 basis point increase since May 2022 and the fastest series of moves since. in 1994.
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Tim Lawless, director of research at Corelogic, said in a note last week, during the company’s monthly price update.
Higher interest rates could hurt investments and “bring the economy closer to recession” next year, said Capital Economics Australia & New Zealand senior economist Marcel Thieliant.
However, Theliant is more optimistic about consumer spending, pointing out that the household saving rate has stabilized.
Lawless isn’t so sure as Australian household debt has hit a record high this year, adding that 77% of that debt is tied to housing.
“Households are likely to be more sensitive to rising interest rates given the region’s record debt levels,” he said.
However, National Australia Bank – forecasts house prices to fall from peak to trough by 18% – does not predict a “disorderly” recession as Australia does not have an oversupply of housing.
The downside is that with rising interest rates, housing affordability will deteriorate despite falling property prices, which remain among the highest in the world, said Moody’s Investors Service.
Latest data from Australian Bureau of Statistics said median house prices in the two largest cities, Sydney and Melbourne, have increased. In the first quarter of this year, prices in Sydney rose 16% year-on-year to AU$1.25 million ($850,000), while prices in Melbourne increased 9% to almost $1 million. Australia ($680,000) in the same period.
