The negative impact of interest rate rises on Australian housing prices, household spending and the volume of dwelling investments may hurt consumer confidence and fuel the likelihood of a recession.
The Reserve Bank of Australia has raised interest rates three times in a row.
The cash rate was raised by 50 basis points to 1.35%, joining central banks around the world, as the Reserve Bank of Australia tries to bring inflation under control.
There will be a big hit to households if house prices fall between 15% and 20% in capital cities in the next few years, according to a senior economist from the Australian arm of the financial services company.
She said that the fall will be 15%- 20%.
We have had a very big run-up in home prices over the past two-and-a-half years because we have had such a strong housing market.
Because of the wealth effect that comes through when home prices decline, it will be a hit to households.
In an interview with " Street Signs Asia", the Chief Economist of Royal Bank of Canada said she was expecting a peak-to-trough 19% drop in housing prices and that it could hurt consumer confidence.
She said that the predicted price declines are smaller than the increase in house prices.
In the three years since the beginning of the year, house prices in major cities have increased by 40%, which is outsized compared with other boom periods, such as the five-year period between 2012 and 2017.
The first rate hikes in 11 years took place this year. The cash rate could go up to 2.5% or 2.85%, according to economists.
In February, house prices fell for the first time this year, and prices for houses were higher than for apartments.
Considering inflation is likely to remain stubbornly high for some time, and interest rates are expected to rise substantially in response, it’s likely the rate of decline in housing values will continue to gather steam...
In the past three years, house prices have risen quickly because of the low interest rates maintained by the Reserve Bank of Australia. Australian residents and first-time home buyers were the main drivers of house purchases due to low rates.
As rates start to rise, everything is going to change.
The number of auctions and national clearance rates have begun to fall.
The number of successful auctions in the past week was less than last year.
The Reserve Bank of Australia lifted its cash rate by 50 basis points to 1.35% in July 2022, marking 125 basis points of hikes since May 2022 and the fastest series of moves since 1994.Tim Lawless, research director at Corelogic said in a note last that it was likely that the rate of decline in housing values would become more widespread due to inflation and interest rates rising.
Capital Economics Senior Australia & New Zealand Economist Marcel Thieliant said that higher interest rates could cause the economy to go into recession.
Theliant was more positive about the household savings rate.
Australian household debt reached a record high this year, and Lawless wasn't sure if he was right.
He said that households are likely to be more sensitive to rising interest rates due to record levels of debt.
Australia doesn't have an oversupply of houses so the National Australia Bank doesn't predict a "disorderly" downturn.
Despite falling property prices which remain one of the highest in the world, housing affordability will get worse with interest rates rising, according to Moody's investors service. According to the latest data from the Australian Bureau of Statistics, median house prices in the two biggest cities in Australia have gone up. In the first quarter of this year, the average price of a home in Australia's largest city rose by more than a million dollars, while the average price in the country's second largest city rose by less than a million dollars.
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