‘Overly aggressive hiking cycle’ to test housing market

The Reserve Bank of Australia’s (RBA) December cash-rate decision has drawn a contrasting gamut of reactions from members of the finance industry.

Speaking to Sky News soon after the RBA lifted the rate by 25 bps to 3.10 per cent on Tuesday (6 December), federal Treasurer Jim Chalmers conceded the announcement was “difficult news” for a lot of people.

“It’s very difficult news … I think this is the Christmas present that no Australian homeowner wanted, but the reality is we’ve now had eight consecutive interest rate rises, which began before the election in May,” he explained.

“And so this will have a harsh and heavy impact on monthly repayments for a lot of Australians, something like $75 a month for every $500,000 that people owe.

“But I think perhaps the most interesting element of the statement released by the independent Reserve Bank … was the point that they made about not just the trajectory of future rate rises, but also that they expect household spending to slow — but the magnitude of that slowdown and the timing of that slowdown is still uncertain.

“And so I think that is really the key consideration for us in the economy.”

Later responding to ABC’s PM show, the Treasurer said he expected that Australia’s current “inflation challenge” still “has a little way to run”.

“We expect it to peak at some point over the Australian summer, but then to be a relatively persistent challenge for a little while after that,” he explained.

“What the independent Reserve Bank has made clear … in coming to their decision is that we are seeing the beginnings of some softening in household spending but also equally, they have flagged that further increases might be necessary.

“And so they will try and strike that balance.

“For us in the government and in the Treasury forecasts that I included in the Budget in October, we expect consumption to soften a bit next year, we expect the economy to slow a bit next year and that will be a consequence of these interest rate rises, combined with a global slowdown.”

The impact on housing

While any slowdown in spending will help ease inflation, some economists have lambasted the RBA’s decision.

Describing the December rate hike as “unnecessary”, Housing Industry Association (HIA) chief economist, Tim Reardon, said the RBA will not restore the economy to stable growth by putting the housing industry through ‘boom-and-bust cycles’.

“Home buyers have exited the new home market rapidly following the first increase in the cash rate in May,” Mr Reardon explained.

“The RBA should have paused to observe the impact of the fastest increase in a generation and not continued to raise rates.

“Home building was already set to slow significantly in 2023 and today’s rate rise will exacerbate this downturn.”

Mr Reardon noted that the number of loans for the construction or purchase of new homes has fallen to its lowest level in over three years, with declines seen in all market segments, with lending to first home buyers, owner-occupiers, and investors continuing to fall in October.

“This slowing in housing finance data is consistent with other leading indicators, such as HIA’s New Home Sales Survey, which shows sales have fallen by 37 per cent in the four months to October,” he said.

“The risks to household and business finances from such an overly aggressive hiking cycle are clear.

“A deep and prolonged trough in home building activity will jeopardise the return of the economy to stable growth.”

Sticker shock for mortgagors

Economic analysts at CoreLogic have also flagged that “rate rise number eight” could cause “sticker shock” for mortgage holders, while flagging the test that the housing market will face in 2023.

CoreLogic Australia’s head of research, Eliza Owen, explained: “The RBA increased the cash rate a further 25 basis points to 3.10 per cent, marking the largest rate tightening cycle since the early 2000s at 300 basis points,” adding that a cash rate of 3.1 per cent is the highest target adopted in 10 years.

Ms Owen suggested that there are early signs of a slight shift in the Australian economy, with further slowdowns expected as monetary policy permeates spending decisions.

“However, there are still some indicators it is too early for a pause in the rate tightening cycle,” she stated.

Ms Owen further explained that the impact of recent rate rises on housing is flowing through to lower volumes of new mortgage finance secured.

“From May through to October of this year, the monthly value of secured finance declined -17.9 per cent while annual sales volumes have trended -13.3 per cent lower compared to this time last year,” she highlighted. Consumer sentiment through November also dropped a notable -6.9 per cent, Ms Owen said.

“A lift in the cash rate of 300 basis points is noteworthy because of the 300 basis-point buffer on home loan serviceability assessment introduced by APRA in October last year,” she continued.

“New variable home loan rates for owner occupiers increased from a low of 2.41 per cent in April 2022 to 4.58 per cent in October.

“Assuming the November and December increases to the cash rate are passed on in full, this could take average new variable rates to 5.08 per cent.

“For those rolling off of low fixed-term rates, an average variable rate of 5.08 per cent may create a ‘sticker shock’, noting average fixed-term rates of three years or less bottomed out at 1.95 per cent for owner-occupiers.

“At 3.1 per cent, the cash rate has now entered the lower bound of major bank forecasts for a peak in the cash rate, with forecasts made in October ranging from 3.1 per cent to 3.85 per cent.

“The higher rate environment will test housing market conditions in 2023, when the majority of outstanding fixed-term mortgages are expected to expire.”

[Related: ‘Ho, Ho ... oh no!’ RBA announces December rate rise]