The negative impact of rising interest rates on Australian house prices, household spending and the volume of property investment could hurt consumer confidence and fuel the likelihood of a recession in Australia, analysts say and economists.
The Reserve Bank of Australia raised interest rates for the third consecutive time on Tuesday.
Joining central banks around the world, the bank raised the cash rate by 50 basis points to 1.35% after two previous rate hikes this year of 25 and 50 basis points, as the RBA tries to rein in the ‘inflation.
Anticipating a “peak to trough” fall in property prices between 15% and 20% in capital cities in 2023, AMP Australia’s senior economist Diana Mousina told CNBC’s “Street Signs” on Tuesday that the extent of this fall would be a “great success” for households.
“Over many decades in Australia we have seen some small corrections, but this [15%-20%] will be a pretty decent fall,” she said.
“We’ve obviously had a very big rise in house prices over the last two and a half years of the pandemic because we’ve had such a strong housing market, a lot of demand for parts of Australia as well.”
“It will just be a bit of a blow to households…because of the wealth effect that occurs when house prices fall.”
RBC Capital Markets chief economist Su-Lin Ong told ‘Street Signs Asia’ that she expects house prices to fall 19% from peak to trough and that this could bring a “reasonably large” blow to consumer confidence.
But she also said those predicted price declines were less than the nearly 40% increase in house prices in the three years since 2019.
This 40% growth – mostly in major cities – in the three years since 2019 is outsized compared to other boom times, including the recent five-year period between 2012 and 2017, when oil prices Real estate has risen by 50% in places like Sydney and Melbourne, according to property data providers such as Corelogic.
This year’s interest rate hikes marked the first rate hikes in 11 years, and more are expected. Economists predict that the cash rate could reach between 2.5% and 2.85%.
House prices fell for the first time in February this year after rising fervently during the pandemic, and house price increases have been stronger than those for apartments.
House prices have risen rapidly over the past three years amid ultra-low interest rates maintained by the RBA in its effort to cushion the economic downturn from the pandemic. The low rates have boosted home purchases, mainly among Australian residents and first-time home buyers, as opposed to overseas investors or buyers.
But all of that is changing now that rates are starting to rise.
National auction settlement rates and the number of auctions – barometers of the strength of Australia’s housing market – have started to decline.
There were fewer auctions last week compared to the same period last year, according to Corelogic. Only 55% of those listed passed, down from 72% at the same time last year, the data showed.
The Reserve Bank of Australia raised its benchmark rate by 50 basis points to 1.35% in July 2022, marking 125 basis points of hikes since May 2022 and the fastest series of moves since 1994.
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“Given that inflation is expected to remain stubbornly high for some time and interest rates are expected to rise significantly as a result, it is likely that the rate of decline in home values will continue to grow and decline. become mainstream,” Tim Lawless, director of research at Corelogic said in a note last week, during the company’s monthly pricing update.
Higher interest rates could dampen investment in housing and “bring the economy closer to recession” next year, said Marcel Thieliant, senior economist at Capital Economics in Australia and New Zealand.
But, Theliant was more bullish on consumer spending, pointing out that the household savings rate was solid.
Lawless was not so sure given that Australian household debt has hit record highs this year, adding that 77% of that debt is housing related.
“Households will likely be all the more sensitive to rising interest rates due to record levels of debt held by the sector,” he said.
However, the National Australia Bank – which expects house prices to fall by 18% from peak to trough – does not predict a “messy” slowdown because Australia does not have an oversupply of homes.
The flip side is that with rising interest rates, housing affordability will deteriorate despite falling house prices, which remain one of the highest in the world, Moody’s Investors Service said.
The latest data from the Australian Bureau of Statistics indicates that median house prices in the two largest cities of Sydney and Melbourne have increased. In the first quarter of this year, prices in Sydney were up 16% year-on-year to 1.25 million Australian dollars ($850,000), while those in Melbourne were up 9% to almost 1 million Australian dollars ($680,000) over the same period.