Housing market reacts strongly to rate hikes

“The cash rate has been raised quickly from emergency settings in a short amount of time. Taking this into account, the RBA decided to raise the cash rate by 25 basis points this month as it looks at the outlook for inflation and economic growth in Australia,” said Mr Groves.

The latest rate decision comes against a background of declining values due to previous rate hikes. The daily CoreLogic Home Value Index for the combined capital cities is currently down 5.7 per cent from its peak shortly after the first increase in the cash rate. However, the rate of decline in values had slowed since August, when it was down 1.6 per cent.

The slowing of the housing market downswing is happening at the same time that auction clearance rates are going up through September and the spring selling season is getting off to a slow start. The average number of new listings in the capital cities was 12.2 per cent lower than the average for the previous five years.

Buyer demand is also dropping from last year’s high levels, with estimated sales activity down 11.4 per cent so far this year compared to the same time in 2021.

CoreLogic has also revealed that rent prices have started to slow down, which may be a sign of how consumer price index (CPI) rents will move in the future.

According to Mr Groves, “all eyes will be on the October 25th federal budget and the September quarter CPI the following day. These will be a major determinant in the RBA board’s November decision.

“Taking the cash rate much above this level would risk an unnecessarily abrupt slowing in growth in 2023.”

He believes it would be smart for the central bank to wait for the lag response to the five previous increases, with signs that tighter monetary policy is already causing a slowdown in household spending and confidence, business investment, and the normalisation of house prices as higher mortgage payments squeeze real incomes.

Despite the concerns, Mr Groves acknowledges that rising interest rates have helped slow the property market’s rapid growth since 2020 — and some buyers are set to benefit: “First-time buyers are benefiting from stable housing prices and rising cash rates, which are adding money to their down payments.”

The latest lending data from the Australian Bureau of Statistics shows that the total value of new loan commitments for housing fell by 3.4 per cent to $27.4 billion in August 2022, after falling by 8.5 per cent in July.