Will rising interest rates put the brakes on Australia's property market recovery?

The latest interest rate hike and the risk of another rise in the coming months could slow Australia’s property market rebound, but won’t be enough to halt further price rises, experts say.

Tuesday's decision to increase the cash rate to 4.35% comes as a fresh blow to homeowners who have already seen their mortgage repayments skyrocket over the past 18 months.

The November rate rise had been widely expected after higher-than-expected inflation in the September quarter gave the RBA little choice other than to increase interest rates in order to get inflation back to its 2-3% target band within a reasonable timeframe.


Recent comments from RBA governor Michele Bullock had signalled the bank has a low tolerance for allowing high inflation to linger and risk becoming entrenched.

But even though the latest interest rate rise will further reduce home buyers’ borrowing capacities, economists say the impact will be offset by more powerful factors driving the home price surge across the capitals.

How the latest rate rise could affect the property market

PropTrack senior economist Eleanor Creagh said record levels of net overseas migration, limited housing stock and a supply pipeline further restricted by the construction slowdown had offset the impacts of interest rate rises, helping push up prices.

"This additional increase in interest rates may slow the current pace of home price growth but is unlikely to deter these gains, with strong population growth, tight rental markets and a housing shortfall fuelling further price rises."

The latest PropTrack Home Price Index shows home prices are up 4.93% already this year.

Prices are tipped to rise a further 5% next year, according to NAB, even though the bank has predicted a further rate hike in February.

"We expect the board to form the view that a single 25 basis point adjustment to rates is not enough to mitigate the risks on inflation," said NAB chief economist Alan Oster.

There were signs that price growth was slowing, Mr Oster said, including an increase in listing and auction volumes that could soak up demand, meaning prices wouldn’t rise in 2024 as rapidly as this year.

"We’re already seeing softness, therefore we’re not expecting the current surge to continue," he said.

An increase in listing numbers and auction volumes has already slowed price growth, according to NAB chief economist Alan Oster. Picture: Andrew Parliaros

AMP head of investment strategy and chief economist Shane Oliver said the latest interest rate rise would reduce borrowing capacities by about 2%, and the risk of another hike would keep buyer demand subdued, further slowing price growth.

"This will accentuate that slowing in price growth that we have seen and runs the risk that prices will turn negative again," he said.

"We’ve seen auction clearance rates slowing down, which suggests that still high interest rates have started to get the upper hand again over the huge supply shortfall we have on the back of booming immigration," he said.

"Historically when [clearance rates] fall below 60%, it's associated with falling prices."

However, easing demand wasn’t a bad thing for buyers, Mr Oliver said, considering prices have reached record highs in Sydney, Brisbane, Perth and Adelaide.

"Life is always easier for buyers when there’s less demand out there," he said. "When prices are down and nobody wants to buy, and when auction clearance rates are at a low, that's normally a good time for buyers, assuming they’ve got the finance."

"For those who still have the finance and can put their hands over their ears and ignore the negative commentary, it does provide opportunities."

Will the RBA raise interest rates again?

A slight tweak to the language in the RBA’s statement following its November rate decision made it a little less likely that another rate rise was on the cards, according to Mr Oliver.

"The Reserve Bank’s comments are a bit hawkish, but they seem to have relaxed their hiking bias," he said. "They’ve probably finished [raising rates], but I’ve been too optimistic on this for a while now."

Mr Oster said there was a chance of another rate rise in December, but a February rate hike was more likely given the board would have the chance to review the next round of quarterly inflation data at that meeting.

The big banks are split over whether the RBA will raise rates again. Picture: Getty

Westpac chief economist and former RBA assistant governor Luci Ellis said if inflation proved to be more persistent than expected, the RBA would respond.

"Over the next few months they’re going to be watching the data very carefully — particularly inflation, unemployment and the world economy, as well as spending here in Australia — for any further surprise that might induce them to act again," she said.

"But if things turn out as they expect, they may be content to hold from here."

Commonwealth Bank head of Australian economics Gareth Aird said it was doubtful that there would be enough evidence in data released over the next month to justify back-to-back rate increases.

"We think the probability of a follow-up 25 basis point rate hike in December is quite low," he said. "February 2024 looks the more likely month if the RBA is going to pull the rate hike trigger again."

"Our expectation is that there will be enough signs in the data by early next year for the RBA to conclude that a further increase in the cash rate is not warranted."

CBA expects the first rate cut will be delivered in September next year, while NAB believes there won’t be a cut until November.

Originally published at: https://www.realestate.com.au/news/will-rising-interest-rates-put-the-brakes-on-australias-property-market-recovery/