Interest rate rises looking to be confirmed. Will house prices fall?

Although the next move from the Reserve Bank will be to raise rates, they may not rise as quickly as expected. The annual pace of housing price growth is expected to continue to be slow, and we expect a continued moderation in buyer demand.

Greater willingness from vendors to list their properties will provide more choice, improving the imbalance between supply of properties for sale and demand. However, we do not expect housing prices to fall – but several other things will happen when rates rise.

Even if the RBA keeps the cash rate at a record low of 0.10% until early 2023, mortgage rates will rise. 

Fixed rates have already risen off record lows and have been creeping higher in recent months. Bank funding costs are on the rise, and this is likely to see variable rates heading higher later this year especially if the RBA does raise the cash rate this year. Rising mortgage rates will restrict the amount that new borrowers can achieve, and existing borrowers will see higher repayments. Already high home prices, along with bottoming mortgage rates, will slow annual price growth.

In the September quarter of 2021, the household saving ratio increased to 19.8% from 11.8% in the June quarter. This has been driven mainly by the lockdowns in Sydney and Melbourne whereby households had fewer avenues to spend money. Furthermore, government support payments, tax relief and dividend payments have seen incomes increase, while households spent less, presenting a sizeable cushion for households to fall back on.

Many current homeowners have accumulated substantial equity gains, following the recent run up in housing prices.Remote work arrangements and the experience of lockdowns have seen housing preferences shift, both with the type of home and the location.The combination of these two factors should support transaction volumes in 2022. In addition, increased economic certainty will see those that held back during lockdowns last year having the opportunity to transact.In addition, as international borders reopen, and skilled migrant workers and international students return, the renewed demand for inner-city rentals and increased rental price pressures may further entice investors into action.Investor enquiries climbed steadily through 2021 and is now 30.4% higher year-on-year, with the share of enquiries from investors hovering around the highest level recorded in more than three years.

Until there is evidence that wages growth is notably higher than present, the cash rate is unlikely to be rising. For inflation to be sustainable, wages will need to be growing at a stronger rate. There needs to be a broad-based pick-up in wages for the cash rate to rise this year, not just in industries where wages have risen as a result of the pandemic. The largest wage increases in the September quarter of last year were in construction and professional, scientific and technical services. 

The RBA is unlikely to raise rates so far and fast that the economy goes backwards and the housing market crashes. If rates rise too far and too fast it would promote sustained weakness in the economy and housing market. The outcome would mean  fewer people would have jobs, wages growth would be weaker and overall economic activity would reduce.  

The bottom line is that when interest rates rise, the economy will strengthen.