February cash rate hike continues mortgage pain

The fine line between pleasure and pain is now firmly skewed towards the latter, as the Reserve Bank of Australia (RBA) called its ninth consecutive hike, upping the official cash rate to 3.35 per cent on Tuesday (7 February).

The extra 25 bps from December’s pre-holiday 3.10 per cent rate didn’t surprise many economists, with 3.35 per cent — the highest cash rate level since late 2012 — largely expected to increase further at the next RBA board meeting on Tuesday, 7 March 2023.

February’s rate announcement followed last May’s 25-bp increase, then 50-bp hikes in June, July, August, and September before returning to 25-bp hikes in October, November, and December 2022.

There was no rate call in January, as is always the case, but which — given the current rising rate environment — might have had many mortgage holders counting their blessings and buying a lottery ticket.

The latest hike means mortgagors have been slugged an extra 325 bps to their home loans over the past 10 months, all part of the RBA’s tightening cycle to curb high inflation.

After January inflation figures hit a new 33-year high, Australia’s major banks had largely anticipated a 25-bp jump, with scope for a higher 40–50-bp increase depending on various factors.

In a prepared statement following the announcement, RBA governor Philip Lowe commented: “The Board recognises that monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments.

“There is uncertainty around the timing and extent of the expected slowdown in household spending.

“Some households have substantial savings buffers, but others are experiencing a painful squeeze on their budgets due to higher interest rates and the increase in the cost of living.

“Household balance sheets are also being affected by the decline in housing prices.

“Another source of uncertainty is how the global economy responds to the large and rapid increase in interest rates around the world.

“These uncertainties mean that there are a range of potential scenarios for the Australian economy.”

Rates and inflation highly uncertain

CoreLogic research director, Tim Lawless, said while Tuesday’s (7 February) cash rate rise was broadly expected, the trajectory of interest rates over the coming months remains highly uncertain and this is tied to the outlook for inflation, which in itself is shrouded in uncertainty. 

“The latest rate hike takes recent borrowers outside of their serviceability assessments at the time of origination,” Mr Lawless explained. 

“Considering most lenders were showing mortgage arrears to be around record lows last year, it’s likely some evidence of rising mortgage stress will start to emerge in 2023 under such substantially higher interest rate settings, with the potential for a more noticeable lift as further fixed rate borrowers migrate over to variable mortgage rates.

“Any material rise in mortgage arrears is unlikely unless labour markets loosen substantially.”

The roller-coaster ride continues, says HIA

“A return to stable economic growth will not be achieved by putting the housing sector through boom-and-bust cycles,” stated HIA’s chief economist Tim Reardon.

“Lending for new homes is down by 62.4 per cent since its peak in January 2021, to its lowest level since November 2012.

“Sales of new homes have stalled in recent months as market confidence declines.

“This poor data is as a consequence of the fastest increase in the cash rate in a generation. Despite this, the impact of last year’s rate increases won’t be fully apparent until late this year.

“The decision by the RBA to increase rates further in 2023, will further erode market confidence and accelerate the downturn that is already evident.”

Property price falls likely to accelerate

PropTrack director for economic research, Cameron Kusher, commented: “At the beginning of May 2022, official interest rates were sitting at 0.1 per cent. By the end of 2022, the cash rate had increased to 3.1 per cent.

“Today, the Reserve Bank lifted rates another 25 basis points.

“As a result of the fastest and most significant interest rate tightening cycle in many decades, the cash rate is the highest it has been since September 2012. 

“With borrowing costs continuing to rise and the subsequent reduction in borrowing capacities, property price falls are likely to continue and accelerate in 2023, with the more expensive cities likely to see the largest price falls.

Sustained evidence of cooling sought

CreditorWatch chief economist, Anneke Thompson, commented: “The Reserve Bank of Australia (RBA) today chose to continue down their path of monetary policy tightening, adding another cash rate increase on top of the eight increases totalling 3 per cent in 2022.

“While there are early signs that consumers are now starting to reduce spending, and businesses are far less optimistic about the year ahead compared to 2022, the RBA clearly wants to see some sustained evidence of a cooling economy before pausing any further cash rate increases.

“What the RBA does next will depend heavily on January’s retail trade result.

“Inflation also appears to be moderating, and we should see further drops in the rate of price growth as data is now being measured off 2022 figures, when price rises had already kicked in.

“Another factor that will be key to the RBA board’s decision making is business confidence and conditions.”

[Related: Inflation hits new 33-year high]