At it's latest board meeting the RBA lifted the cash rate by 25 basis points.
Now that’s the sixth consecutive rate hike, taking the cash rate to 2.6% - the highest it’s been since 2013.
Having delivered a shock and awe campaign of massive interest rate hikes since May, the Reserve Bank of Australia chose to slow the pace of policy tightening at its October board meeting.
Despite robust retail sales and a tight labour market, Reserve Bank governor Philip Lowe wants to watch and wait for more information on consumer spending, inflation and wages.
The latest rate hike will further increase borrowing costs and thereby reduce maximum borrowing capacities, weighing on property prices, with the maximum amount prospective buyers can borrow now dropping by more than 20% since earlier this year before rates started rising.
Not surprisingly this year's fast pace of rate hikes has seen home prices falling across the country, with prices nationally now sitting 3.4% below their March peak, but still remaining 30.7% above pre-pandemic levels.
Why has the RBA slowed?
Well, the economy entered the tightening cycle with solid momentum, the unemployment rate is at a 48-year low, spending is yet to slow, and business conditions remain strong.
Obviously, household budgets are under pressure as the cost of living has risen, and with real wages growth in negative territory – many are feeling the pinch.
However, the lagged effect of rate rises, a large share of variable rate borrowers ahead on repayments and borrowers on fixed terms yet to expire, means many mortgage holders are only now beginning to feel the impact rate rises.
Hence, uncertainty remains on how households will eventually react to the rate rises once the rate hike lag passes through.
Ms Eleanor Creagh, Senior Economist at REA shared her insights:
"As households with mortgages begin to feel the impact many will be forced to make budgetary adjustments and discretionary spending will likely slow.
Particularly given the cost of living has risen and wages growth hasn’t accelerated meaningfully.
The previous strong momentum economy is likely to fade as these effects transpire.
This is one reason why the RBA decided to slow the pace of its tightening cycle, giving them time to better assess the impact of what is a substantial tightening on the economy and household spending.
While inflation expectations have risen, the lift has been moderate in comparison to other countries.
In combination with wage pressures, which remain more modest in Australia, the board have been able to begin to ease off the gas with respect to their tightening cycle.
These comparisons have given the RBA some justification to slow the pace of their tightening cycle, reflected in the return to ‘business as usual’ rate rises.
Another risk outlined by the Reserve Bank is global economic conditions, which have fast deteriorated as higher inflation and sharply rising interest rates have dimmed the economic mood.
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The US is already in a technical recession (two consecutive quarters of negative growth), and weak China growth, Eurozone frailty and a looming pullback in the British economy all make global recession a risk.
These factors would have all played a role in the decision to slow the tightening cycle."
What does this mean for the property market?
Homeowners are likely to welcome the smaller-than-expected increase, though interest rates have still risen substantially this year and many borrowers will need to make budgetary adjustments as repayments increase.
However, it seems home buyers are taking rising interest rates in their stride after the initial shock of the Reserve Bank’s first hike in May.
Ms Creah said:
"Some prospective buyers may welcome the less-than-expected increase in interest rates, and although home prices are falling, the balance in market conditions could make it easier to get into the market."
A slow start to the spring selling season
Clearly, the combination of interest rates moving sharply higher, rising mortgage rates and expectations of continued price falls, has weighed on buyer demand and is contributing to slowing selling activity.
However, the public holidays are likely to have also weighed on spring selling activity.
Ms Creagh commented:
"Unlike the seasonal uptick in activity that September has brought over the past two years, at a national level preliminary sales volumes show that transactions have fallen as spring has sprung.
Nationally, preliminary monthly sales volumes have fallen 3% month-on-month in September, with national sales volumes down 16% last month compared to September last year.
Though Canberra, Hobart, Sydney and Darwin have bucked this trend recording the typical seasonal uptick.
The big change from Spring last year is not just higher borrowing costs, but also the amount of choice for buyers, which has greatly improved.
The spring selling season may have got off to a slow start with the public holidays weighing on activity, but now the expectation that interest rates might not climb so high and so fast could give some prospective buyers a confidence boost leading to an uptick in activity through October.
The reduction in borrowing capacities will push prices further down with home prices continuing to fall throughout spring as interest rates rise.
However, the depth of the downturn will be offset by tight rental markets and rental price pressures, low unemployment, constrained housing supply and rebounding foreign migration."
