RBA rate rises a slippery slope to downturn

The RBA has followed up its shock May official rate rise - the first in over a decade, with another increase over June – but this time by an extraordinary, near-record 0.5%.

June’s rate increase is the highest since the same result recorded in February 2000 and the second-highest on record behind only the 0.75% increase recorded over August 1994 – 28 years ago.

The RBA has clearly decided to go early and go hard with rate rises in an attempt to control the highest inflation in decades.

Why is there another increase?

The policy aim for sharply higher rates is to reduce demand in the economy and dampen inflation, however, the clear risk is that reduced demand will lead to higher unemployment setting the scene for a hard landing - a significant economic downturn.

In the shorter term, however, the economy is well placed to cater for higher rates with current record low unemployment, rising wages, high savings levels, government handouts, and the wealth effect from recent strong home price growth - and rates are still at near historically low levels.

The interest rate repayment buffer set by banks for borrowers – currently 3%, will also provide an offset to the impact of higher rates on household budgets.

The question is how high do rates have to rise until inflation eases – particularly given the impact of uncontrollable outside forces notably record oil prices. Higher rates over time will diminish the current offsets resulting in harder times for households.

Housing markets are also initially well positioned to cope with higher interest rates with underlying demand set to remain ahead of supply in most capitals.

What's ahead?

With borders now open, migrants and international student numbers will surge; significant numbers of first home buyers are set to take advantage of recently announced government support policies, and high levels of investors will continue to be attracted to rental markets with record-low vacancy rates and skyrocketing rents.

And with recent underbuilding – particularly apartments, set to continue, the prospect remains of demand well above supply.

In the short-term, however, housing markets will again be confronted by the fear factor with the usual predictions from the usual suspects of house price crashes and an uncertain outlook on rates and the economy, motivating buyers and sellers to sit on their hands.

The usually quieter winter selling season will be exacerbated this year by falling confidence and the fear factor resulting in likely continued downward pressure on home prices with non-discretionary sellers just having to accept what the market offers.

The fear of missing out on energy that strongly activated markets last year has now reversed to the fear of being involved.

ALSO WATCH: More signs we’ve moved to the next phase of the property cycle | Property Insiders [Video]

About Dr. Andrew Wilson Dr Andrew Wilson, Chief Economist of www.MyHousingMarket.com.au is widely regarded as Australia’s leading property economist.