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By Eliza Owen

RBA surprises with a 0.25% rise, but cash rate surpasses the pre-COVID decade average

At the board meeting on 4th October the RBA took the cash rate target 25 basis points higher, a lower increase than in the preceding four months.


At 2.6%, the cash rate target is now at the highest level since July 2013 and surpasses the decade average prior to the onset of COVID-19 (which was 2.55%).

The current rate tightening cycle is the fastest since the early 1990s.

The sixth consecutive lift in cash rate amidst various economic conditions

The sixth consecutive lift in the cash rate occurred amid ongoing inflationary conditions and a tight labour market.

While the unemployment rate ticked slightly higher in August to 3.5%, the slowdown in employment growth may represent capacity constraints to further employment, which could drive wage growth.

Retail spending continued to rise another 0.6% through August, albeit at a lower monthly growth rate than in July.

A new monthly measure of Australian CPI showed annual inflation easing slightly through August, down 20 basis points to 6.8%.

While the monthly decline is promising, this new measure has not yet been seasonally adjusted and may not have factored into the board’s decision.

Additionally, international economic conditions may create added pressure for the RBA to continue to raise rates, as the US Federal Reserve lifted its policy rate target by 75 basis points in September.

The housing market reacts

Housing markets have reacted strongly to the rate hiking cycle, with the daily CoreLogic Home Value Index for the combined capital cities currently down -5.7% since peaking shortly after the first lift in the cash rate.

However, the rate of decline in values eased through September, at -1.4%, compared to a -1.6% decline in August.

The slowing in the housing market downswing coincides with a lift in auction clearance rates through September and a lacklustre start to the spring selling season.

New listings across the capital cities trended -12.2% below the previous five-year average.

This suggests there has been little motivation to sell property, despite consecutive mortgage rate rises.

It is unclear whether this is the start of a trough in market conditions, or if the lack of motivated vendors is more due to a lag between cash rate rises and monthly mortgage repayments.

Housing Market

Buyer demand is also tapering off from high levels last year, with estimated sales activity down -11.4% over the year-to-date compared to the same period in 2021.

Assuming today’s cash rate rise is passed on to mortgage rates in full, the average variable mortgage rate for a new owner-occupier loan could rise to around 4.76%, up from 2.4% in April.

A new principal and interest loan of $750,000 would take monthly mortgage repayments from $2,925 per month in April to $3,917.

This scenario clarifies the impact of rising rates on buyer demand, with further mortgage rate rises through October likely to place additional downward pressure on the housing market.

Recently released data from the RBA shows housing debt to annualised disposable income shot up to a record 144.1% as of June 2022, reinforcing the significance of rate rises on household balance sheets.

What can we expect moving forward?

The good news is that the RBA has delivered a slowdown in the rate of increase.

Economic indicators are showing a slight unwinding in the labour market and steadying inflation.

From the CoreLogic perspective, growth in rent values has started to ease, which may be a leading indicator for the trajectory of CPI rents.

The board expects further increases in inflation in the months ahead, before declining back towards the 2-3% range in 2024.

Once the cash rate reaches a peak, we may also see a floor in the housing market downturn.

About Eliza Owen Eliza is head Of Residential Research Australia for Corelogic and a respected property market commentator. Eliza holds a first class honours degree in economics from the University of Sydney
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