More mega rate hikes coming, after fastest slowdown in home prices in 30 years

More super-sized interest rate rises are expected after the biggest hike in 22 years, with home prices already recording the fastest slowdown in more than three decades.

Australians grappling with rising grocery, petrol, and energy prices face further hits to their household budgets as the Reserve Bank of Australia steps up the pace of its rate hikes to fight soaring inflation.

The RBA surprised with a super-sized 50 basis point hike – the biggest since February 2000 and the first back-to-back rise since May 2010 – on Tuesday that took the cash rate to 0.85%.

Economists at the major banks now expect another 50 basis point hike in July and/or August and that the cash rate will surpass 2% by the end of the year, adding hundreds of dollars to typical mortgage repayments when passed on by lenders.

New PropTrack analysis shows home prices have recorded the most rapid slowdown in more than 30 years, in anticipation of higher interest rates. Picture: Getty

Releasing new analysis showing home prices have recorded the most rapid slowdown in more than 30 years in anticipation of a series of rate hikes, PropTrack economist Paul Ryan noted that interest rates are now expected to be higher at the end of 2022.

Mr Ryan said by lifting rates by an exceptional 50 basis points, the RBA board has signalled rates need to increase faster than they expected only a month ago.

“This larger than ‘business-as-usual’ hike indicates the RBA is increasingly concerned about domestic inflationary pressures, and has assessed that they need to increase rates quickly to get them under control,” he said.

RBA governor Philip Lowe said the board decided to move by 50 basis points given the current inflation pressures in the economy and the still very low level of interest rates.

Mr Lowe said inflation has increased significantly, with both global supply-side problems and domestic factors pushing up prices, and is expected to increase further before declining back towards the RBA’s 2-3% target range next year.

“Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago,” Mr Lowe said.

Mr Lowe said the size and timing of future interest rate increases will be guided by the economic data and the board’s assessment of the outlook for inflation and the labour market.

“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time,” he said.

How high and fast rates are now expected to rise

With the RBA now expected to front load rate hikes, major bank economists expect further super-sized rate hikes as soon as next month.

National Australia Bank economists said June’s 50 basis point rise is unlikely to be a one-off as the RBA board signals a “rush to a more neutral setting” of rates closer to the 2% to 2.5% range.

Economists say the RBA’s super-sized rate hike in June is unlikely to be a one-off. Picture: Eugene Hyland

NAB is forecasting 50 basis point hikes in both July and August, before a 25 basis point increase in November to take the cash rate to 2.1% by year-end.

“While a cash rate of 2.1% remains at the lower end of our (and the RBA’s) estimates of neutral, such a significant adjustment to rates will substantially affect the economy heading into 2023,” the NAB economists said on Wednesday.

“Currently high household savings rates are likely to fall and, eventually, consumption growth will slow as mortgage payments increase.”

NAB said the pace of rate rises is likely to be much slower in 2023, pointing to two further 25 basis point rises next year to take the target cash rate to a roughly neutral level of 2.6%.

After the RBA lifted rates in May for the first time since November 2010, Mr Lowe said it was not unreasonable to expect the cash rate would get back to “a more normal level” of 2.5% at some point.

Westpac chief economist Bill Evans, who expects another 50 basis point hike in July, said the RBA now recognises it has a significant challenge to contain inflation and is prepared to act decisively.

“By front loading the moves it can firmly establish its inflation fighting commitment,” Mr Evans said.

Westpac expects the cash rate will end 2022 at 2.1%, a policy stance that would be “in the contractionary zone”, and peak in February 2023 at 2.35%.

Economists at the major banks now expect the cash rate will rise to 2.1% by the end of 2022. Picture: Getty

Commonwealth Bank of Australia economists also expect a further 50 basis point rate hike in July and a cash rate of 2.1% at year-end.

“The risk is a higher year-end cash rate of 2.35% which could occur with a hike of 50 basis points in August,” CBA head of Australian economics Gareth Aird said.

“Financial conditions will continue to tighten over 2023 with no change in the cash rate given the big fixed rate home loan expiry schedule.”

CBA is now pointing to the possibility of rate cuts in late 2023.

“With the RBA now expected to take the cash rate to a contractionary setting we have pencilled in rate cuts for the second half of 2023,” Mr Aird said.

ANZ head of Australian economics David Plank said at least another 50 basis point increase is on the cards over the next few months, but August seemed more likely than July given the timing of further inflation and employment data.

Most rapid home price slowdown since 1989

PropTrack analysis released on Wednesday found home prices in Australia’s capital cities have slowed down at the most rapid pace since 1989, after a period of exceptional price growth during the pandemic when prices rose at the third-fastest rate in history.

Mr Ryan said the annual rate of home price growth in the capital cities has slowed from a rapid 24% six months ago to 14% in the year to May.

The PropTrack Home Price Index showed nationally home prices fell in May – the first decline since the start of the pandemic.

Home price growth has recorded the most rapid slowdown in more than three decades, but it follows an unprecedented period of growth during the pandemic. Picture: Getty

He said the slowdown was perhaps not surprising given 2021 marked the third fastest period of home price growth in Australia’s history, but said it is not necessarily the case that growth falls rapidly after a run-up.

“Interest rate expectations have been the key driver of this slowdown.”

Mr Ryan said the latest slowdown has been faster than those experienced in 2004 and during the global financial crisis in 2008, when comparing six-month growth rates.

“Just how high interest rates will be at the end of the year is a key source of uncertainty for the housing market.

“Buyers will be hesitant to bid as aggressively as we saw last year, since there is much uncertainty about how high mortgage repayments will be before the end of the year.”

Mr Ryan said buyers will likely continue to be more cautious.

“This higher-than-expected increase in the cash rate by the RBA will be taken cautiously by buyers and will likely impact sentiment,” he said of the June hike.

While home prices have fallen nationally for the first time since the start of the pandemic, there continues to be a two-speed housing market. Picture: Getty

Mr Ryan said the slowdown has not been evenly distributed across the country and there continues to be a two-speed market.

“The largest cities of Sydney, Melbourne and Brisbane have led the slowdown. By contrast, the smaller capitals of Adelaide and Perth have not experienced anywhere near the same reduction in growth this year.”

Mr Ryan said the rapid slowdown in price growth signals the housing market is likely to continue to experience slow growth over the rest of 2022.

“The outlook for housing prices remains for slower growth in those regions that are still outperforming – the smaller capitals of Brisbane and Adelaide, and regional areas – and potentially more falls in bigger capitals – Sydney and Melbourne in particular have now recorded a couple of months of falls.”

Mr Ryan noted prices are still up 35% nationally since the start of the pandemic, following a period of unprecedented price growth.

He said the market was not experiencing classic downturn conditions at the moment.

“We’re not seeing sellers reluctant to list properties because of market conditions. We’ve actually seen quite a lot of market activity and the amount of stock available in Sydney and Melbourne is now close to decade averages.”

Mr Ryan said there were also plenty of buyers willing to purchase at current prices, despite purchasers bidding less aggressively.

“So far we haven’t seen a downturn or slow market scenario like we saw in 2017-18 and early 2019.”

Despite the slowdown in home price growth, there is still plenty of activity in the market. Picture: Eugene Hyland

AMP chief economist Shane Oliver expects falling confidence and home prices will limit how high the RBA lifts rates.

“Greater sensitivity to higher interest rates will cap how much the RBA ultimately needs to hike by, well below market expectations for a cash rate of 4% or more,” Dr Oliver said.

“Falling home prices and very weak consumer confidence indicate RBA monetary tightening is already getting traction earlier than in past rate hiking cycles.

“We continue to see average home prices falling 10-15% over the next 18 months but this may now occur earlier and faster than previously expected,” he added.

Dr Oliver still expects the cash rate to reach 1.5% to 2% by the end of 2022 and peak at about 2% to 2.5% by mid-2023.

More pressure on household budgets

Household budgets are expected to come under further pressure as electricity and gas prices surge, petrol prices rise and rents and mortgage repayments increase.

Mr Ryan noted a two percentage point increase in interest rates would increase average mortgage repayments by almost 25%.

Higher rents and mortgage repayments will add pressure to household budgets as grocery, power and petrol prices rise. Picture: Getty

While many Australians have built up substantial financial buffers during the pandemic, Mr Ryan said higher living expenses and mortgage repayments will add pressure to household budgets.

He said even those borrowers who should be in a good position to weather rate rises, such as those people who paid higher mortgage rates before taking advantage of sharp fixed rate deals during the pandemic, will feel the impact.

“You’ve got on top of that this incredibly fast inflation that’s increasing the prices of groceries, energy and lots of essentials that people can’t substitute away from, so there’s going to be quite a lot of pressure on a lot of household budgets coming up,” Mr Ryan said.

“To some extent that will do the RBA’s job for it people will spend less money because they can’t buy as much because prices have gone up.”

Canstar analysis showed that for a borrower with a 30-year, $500,000 mortgage, the combined May and June cash rate increases would add $208 to their monthly repayments while someone with a $1 million mortgage would see their monthly repayments rise by $415.

Canstar finance expert Steve Mickenbecker noted the property market is already showing signs of softening.

“Higher interest rates will take the steam out of the market and ease affordability for new borrowers but existing borrowers will likely be viewing rising interest rates with trepidation,” he said.

Borrowers have been preparing for rising interest rates, but still face big increases in their monthly repayments. Picture: Getty

Separate analysis by RateCity showed that should the cash rate hit 2.1% at the end of 2022, someone with a 25-year, $500,000 mortgage could see their monthly repayments rise by $542 in total between April and December.

Total repayments would rise by $1083 for someone with a $1 million mortgage.

“While many borrowers have been preparing themselves for rising rates, they may not have expected the RBA would go this hard and fast,” RateCity research director Sally Tindall said.

EY chief economist Cherelle Murphy said the RBA knows some households will struggle with rising interest rates, consumer prices and energy prices.

“It only has one blunt tool, which unfortunately means some households will see most of their discretionary income eaten up by recent economic developments,” Ms Murphy said.

“While it’s of little comfort to some households, the current level of interest rates, even at the increased level of 85 basis points, is extraordinarily low.”

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