The Reserve Bank of Australia has provided some chilling evidence that it will continue to raise interest rates even after Tuesday’s projected rate hike, as property prices fall at the fastest pace in nearly 40 years.
The Big Four banks all expect spot interest rates to rise another 0.5 percentage points on Sept. 6 — bringing the seven-year high of 2.35%, up from the existing six-year high of 1. .85 percent.
If interest rates rose by that level, a borrower with a typical $600,000 mortgage would see their monthly repayments increase by $173. Interest rates are already rising at the fastest pace in nearly three decades.
The RBA raised rates by 50 basis points last month and hinted clearly in the minutes of its August meeting that more pain was coming for home borrowers — with real estate prices already suffering the sharpest monthly drop since early 1983.
“Given the high inflation rate, the resilient economy and the tight labor market, and taking into account the risks, members agreed it was appropriate to continue the process of normalizing monetary conditions,” the report said.
“The board expects to take further steps in the process of normalizing monetary conditions in the coming months, but it is not on a predetermined path.”
The Reserve Bank of Australia has provided some indications that it will continue to raise interest rates this year as property prices fall at their fastest rate in nearly 40 years (pictured is a house in Melbourne)
RBA Governor Philip Lowe has previously suggested that interest rates would need to rise above 2.5 percent to move above neutral levels — where the goal of monetary policy would be to slow economic activity.
House prices fall in almost EVERY capital in August
SYDNEY: 2.6 percent down to $1,302,635
MELBOURNE: down 1.5 percent to $948,879
BRISBANE: 2.1 percent down to $864,149
ADELAIDE: 0.2 percent down to $707.364
PERTH: 0.2 percent down to $588,308
HOBART: Down 1.7 percent to $772,443
DARWIN: 1.1 percent up to $592,183
CANBERRAE: Down 2 percent to $1,033,377
Source: CoreLogic August data based on median home prices
The Commonwealth Bank, Australia’s largest mortgage lender, expects a cash interest rate of 2.6 percent by November, while ANZ predicts a 10-year cash interest rate of 3.35 percent on the day of the Melbourne Cup.
The era of the record-low cash interest rate of 0.1 percent ended in May, and since then, interest rates have risen to 1.75 percentage points each month — the steepest since 1994.
Severe monetary policy tightening has already hit the real estate market, as CoreLogic data shows a 1.6 percent drop in national home and unit prices in August — the strongest monthly drop since January 1983.
National house prices fell to a median level of $738,321 last month.
But even with a 20 percent down payment, a $590,657 mortgage would be out of reach for a full-time employee with an average salary of $92,000.
In April, before the RBA raised interest rates for the first time since November 2010, someone making $96,300 a year could borrow $600,000, a Canstar analysis found.
But that same potential borrower could only borrow $500,000 right now.
Since November, banks have been obliged to assess a borrower’s ability to cope with a three percentage point increase in variable mortgage rates.
This means that four consecutive rate hikes – with a fifth likely to come in September – are pushing house prices down, while banks’ ability to lend is limited.
House prices fell on every capital market in August except Darwin.
The RBA raised interest rates by 50 basis points this month and hinted clearly in the minutes of its August meeting that more pain was coming for home borrowers — with real estate prices already experiencing the sharpest monthly decline since early 1983 (pictured is the governor of the United States). Reserve Bank, Philip Lowe)
Sydney’s median house price fell 2.6 percent last month, the property market’s sharpest decline since August 1985, bringing it back to $1,302,635 in a city where borrowers are much more sensitive to interest rate hikes.
What the banks predict for 2022
WESTPAC: 3.35 percent spot interest by February 2023
This includes an increase of 50 basis points in September and increases of 25 basis points in October, November, December and February
ANZ: 3.35 percent spot interest by November 2022
This includes a 50 basis point increase in September, October and November
COMMON BANK: 2.6 percent cash rate in November
This includes a 50 basis point rate hike in September and a 25 basis point increase in November
NAB: 2.85 percent spot interest in November
This includes an increase of 50 basis points in September and increases of 25 basis points in October and November
Prices in Melbourne fell 1.5 percent to $948,879.
Adelaide, until recently Australia’s strongest real estate market, suffered a 0.2 percent drop in August, pushing the average home price to $707,364.
Perth, which had also weathered the downturn, also fell 0.2 percent, with home prices falling in the middle to $588,308.
Brisbane remained Australia’s best-performing metropolitan market even after rates rose, but last month prices fell 2.1 percent to $864,149 – the steepest drop in 42-year records.
Hobart prices fell 1.7 percent to $772,443 — the sharpest drop since August 1998.
Canberra’s values fell 2 percent to $1,033,377 – the worst since October 1996 after the new government of former Prime Minister John Howard fired officials.
Regional markets, which benefited from the opportunity for professionals to work from home, fell 1.5 percent in August, the strongest since November 1989, when interest rates were 17 percent.
The regional home price of $615,712 is still more expensive than Perth or Darwin, with coastal values rising halfway through.
Gareth Aird, Commonwealth Bank’s head of Australian economics, said that while borrowers were able to cope with the rate hikes in May, June and July, the rate hike in August finally did a bit.
“Up until July, most borrowers of floating rate mortgages had no impact from a cash flow perspective,” he said.
The era of the record-low cash interest rate of 0.1 percent ended in May, with interest rates rising to 1.75 percentage points each month since then — the steepest since 1994. CoreLogic data showed a 1.6 percent drop in the national house and unit prices in August – sharpest monthly decline since January 1983 (pictured is Melbourne auction in April)
“It allowed them to continue spending as they were before, so the official spending data is strong.”
Mr Aird said the fastest rate of rate hikes in nearly three decades meant some borrowers would now struggle to adjust.
“The rapid pace at which the RBA has tightened policy, combined with a full appreciation of the delays between rate hikes and the cash flow impact on a home borrower, means that the RBA board is flying blind to some extent,” he said.
‘Many households with mortgages will have to adjust their spending patterns in the coming period, because the delayed impact of interest rate increases negatively affects their cash flow.’
Inflation rose 6.1 percent in the period to June, the fastest pace since 1990 when the one-off effects of the introduction of the GST in 2000 were excluded.
Both the Reserve Bank and the Treasury expect the consumer price index to reach a 32-year high of 7.75 percent later this year.
What will an interest rate hike of 0.5 percentage point mean in September?
$500,000: $145 up to $2,472 from $2,327
$600,000: $173 up to $2,966 from $2,793
$700,000: $202 up to $3,460 from $3,258
$800,000: $231 up to $3,955 from $3,724
$900,000: $260 up to $4,449 from $4,189
$1,000,000: $289 up to $4,943 from $4,654
Calculations based on the spot rate increasing 0.5 percentage point from 1.85 percent to 2.35 percent, increasing a Commonwealth Bank variable loan for a borrower with a 20 percent down payment from 3.79 percent to 4. .29 percent