An earlier and potentially bigger interest rate rise could trigger a sharper initial fall in house prices if higher mortgage repayments and lower borrowing capacity spook buyers, experts say.
It could also prompt vendors to preempt the interest rate rises and potentially flood the market with stock, which would further weaken prices.
AMP Capital chief economist Shane Oliver said the Reserve Bank of Australia’s shift to a more hawkish tone on Tuesday suggested a more aggressive rate increase and opened the possibility of larger increases at the start of the tightening cycle, expected to come as early as June.
“The RBA’s statement is consistent with a more aggressive move initially on rates, and that’s where the impact will come in the housing markets,” he said. “There is now a strong chance that the first hike will be 0.4 per cent, taking the cash rate to 0.5 per cent, and we now see the cash rate being increased to 1 per cent by year-end, which would have an impact on the property market quicker than previously. It increases the potential severity of the falls that we’ll see in the second half of this year going into early 2023. I haven’t changed my property market forecasts of a 10 per cent to 15 per cent drop top to bottom, but it’s quite possible that the bulk of the price falls will be felt at the outset.”
Financial markets have been expecting the RBA to lift the cash rate initially by 0.1 per cent.
An earlier and more aggressive move by the RBA could see buyer demand falling well behind supply, said Nicola Powell, Domain’s chief of research and economics.
“We’ve already seen a build-up of stock, particularly in Sydney, which will continue as more sellers list their homes to pre-empt the interest rate rises,” she said.
“But buyers are now becoming cautious and mindful of mortgage affordability and they don’t want to overpay because the market is slowing down, so this weaker demand and heightened supply will drag prices lower.”
CoreLogic research director Tim Lawless said the prospect of higher interest rates was already weighing on consumer sentiment.
“It’s reasonable to argue that when the cash rate does eventually lift, it will have some further downside consequences for consumer sentiment,” he said. “Considering that purchasing real estate is such a high commitment decision, it’s not surprising that households would want to be confident about their household finances and employment outlook before committing to purchasing a home.”
Sydney-based buyer’s agent Jack Henderson, of Henderson Advocacy, said the number of active buyers had already dropped significantly in the past few months.
“The buyer pool is probably about a third of what it was six months ago,” he said. “We used to see at least eight serious buyers for every property, now there’s one or two, so we’re seeing many price reductions as vendors become more willing to negotiate.”
Dr Oliver said that while there would be an initial shock to mortgage holders, he was not expecting a large increase in defaults that could crash the housing market. “I don’t see a crash in house prices, just a pull back because a lot of households are ahead on their mortgage repayments,” he said. “So a rate rise even by over 2 per cent is unlikely to cause a major rise in delinquencies.”
