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By Brett Warren

The impact of RBA’s 25-basis point rate hike on consumers and the housing market

It's happened again.

The Reserve Bank has hiked interest rates in November, ending a four month reprieve for mortgage holders amid renewed fears that inflation is not falling fast enough.

RBA govenor Michelle Bullock said on Tuesday that inflation is still too high, requiring action.

“Inflation in Australia has passed its peak but is still too high and is proving more persistent than expected a few months ago,” Bullock said.

The latest reading on CPI inflation indicates that while goods price inflation has eased further, the prices of many services are continuing to rise briskly.

While the central forecast is for CPI inflation to continue to decline, progress looks to be slower than earlier expected.”

Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks.”

While most economists expected rates to rise, the latest increase has many commentators suggesting this will shake confidence and reduce the rapid growth in the housing market, while others are suggesting this might mean we'll get a reduction in rates earlier than expected next year once inflation is clearly under control.

Having said that, those that are concerned are suggesting slower property price growth , not prices falling.

Interest Rates

Some expert commentary

Luci Ellis, former RBA board member and now chief economist at Westpac commented:

As we expected, the RBA Board raised the cash rate target by ¼ percentage point to 4.35%. Their inflation outlook is stronger, and so is their outlook for the labour market.

But follow-up increases in rates are far from assured.

Ellis went on to say...

We do not expect that the RBA will follow up with another rate increase in December.

The last paragraph of the [RBA] statement contained a shift in language from “Some further tightening of monetary policy may be required” used in the October media release to “Whether further tightening of monetary policy is required”.

This reads as the Board hoping not to have to raise rates again, but being very willing to do so if things change.

There is not enough new information between now and the December meeting to drive a change in view.

Given the upgraded inflation forecasts and lower unemployment forecast, though, they are likely to have even less tolerance for upside surprises than they indicated in recent communication.

So while a December move is unlikely, it is more likely that February meeting would become ‘live’ if the inflation outlook continues to lift.

Meanwhile, Graham Cooke, Head of Consumer Research at Finder, said that the rate hike is a tough pill to swallow for homeowners.

Cook explained:

“Mortgage holders are already on the ropes, the last thing they wanted was another slug from the RBA.

Aussie’s with a $590,000 mortgage will now be forking out roughly $1,345 more per month than they were in April last year.

That’s a huge amount of extra money to be spending on your mortgage, especially when the cost of almost everything else is also going up.”

Tim Lawless, CoreLogic's Research Director commented:

"Persistently tight labour market conditions as well as a pick up in the volume and value of retail spending were probably additional factors supporting a decision to lift rates, alongside concerns that higher housing prices could be contributing to a mild ‘wealth effect’ where homeowners feel more willing to spend.

There is also the risk of inflation becoming entrenched; staying higher for longer due to the price of services continuing to rise and price shocks emanating from global conflicts, including the Israel-Gaza war."

What does this mean for consumers?

According to Lawless,

"Another 25 basis points translates, roughly, to another $80 per month in mortgage repayments on a $500k loan on top of the $1,040 monthly increase already seen since rates started to rise in May last year. "

He further commented:

"Higher interest rates also imply a further diminishing in borrowing capacity as lenders continue to assess borrowers using a three-percentage point serviceability buffer.

While growth in housing values is likely to slow further, it’s hard to see prices going backwards over the near term.

A shortage in housing supply, record low vacancy rates and a lagged flow through to purchasing demand from record levels of overseas migration should help to keep some upward pressure on home values."

Impact of a 0.25%-point hike on monthly repayments

For someone with a $500,000 debt at the beginning of these rate increases, this decision means an extra $76 monthly for their mortgage repayments.

Overall, with all 13 increases, their monthly repayments will go up by $1,210, a 52% increase.

This is considering the borrower hasn't renegotiated their loan since the hikes began.

Loan size at start of hikes 0.25%-point increase to 4.35% Total increase May 22-November 23
$500,000 $76 $1,210
$750,000 $114 $1,815
$1,000,000 $152 $2,420

Source: Based on an owner-occupier paying principal and interest with 25 years remaining. Starting rate is the RBA av. existing owner-occupier variable rate of 2.86% in April and assumes banks pass the hikes on in full.

If lenders pass on the 0.25 percentage point increase, as expected, the average owner-occupier who hasn’t renegotiated their loan since the start of the hikes will be on a rate of 7.11 per cent.

However, Australians do not need to pay a rate this high.

RBA data shows many borrowers have refinanced or negotiated a rate cut from their lender, with the average owner-occupier rate at 6.18 per cent.

Mortgage Payment 3 research director, Sally Tindall, said:

"We all knew it was coming, but this 13th hike is going to feel like a kick in the guts for many borrowers struggling to stay afloat.

Australia has made significant progress in the war against inflation since December of last year, but over the last couple of months, we’ve hit a road bump.

The RBA isn’t willing to give inflation any more leeway over the summer for it to turn into something bigger than a blip.

Many families have struggled through winter under the weight of 12 hikes and a rising cost of living – only to come out the other side with yet another hike.

While the big four banks typically take 10 to 14 days to charge variable borrowers higher rates, they give customers between two to three months’ notice before any extra money comes out of their bank account.

This means today’s decision won’t hit most people’s budgets until 2024, giving households time to take matters into their own hands."

About Brett Warren Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.
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