The Reserve Bank recently hiked the cash rate a further 25 basis points to a 10-year high of 3.1% and signalled its commitment to tackling the “scourge” of inflation.
Eliza Owen, head of residential research Australia at CoreLogic, said there are early signs of a slight shift in the Australian economy, with further slowdowns tipped as monetary policy permeates spending decisions.
“Though modest, retail sales declined through October (the first monthly decline in 2022), falling -0.2%,” Owen said. “Commodity prices have continued to ease, as have supply chain pressures. New dwelling approvals continued to trend lower over October, and although rental markets remain very tight, the rate of growth in rental values has started to ease slightly in some markets. Quarterly growth in capital city rents peaked at 3.1% in July and has since eased to 2.5% in the three months to November.”
Some indicators showed, however, that it was too early for a pause in the rate tightening cycle.
“The September quarter ABS business indicators data, released this week, reflected a 2.9% increase in wages and salaries, a growth rate not seen since 2007,” Owen said. “In October, labour force data showed continued growth in the number of people employed, and the unemployment rate fell 0.1 percentage points to 3.4%.”
The recent rate hikes have led to lower volumes of new mortgage finance secured, with the monthly value of secured finance slipping -17.9% from May to October. Annual sales volumes were down -13.3% compared to this time last year. Consumer sentiment through November also fell a notable -6.9%.
“A lift in the cash rate of 300 basis points is noteworthy, because of the 300-basis-point buffer on home loan serviceability assessment introduced by APRA in October last year,” Owen said. “New variable home loan rates for owner-occupiers increased from a low of 2.41% in April 2022, to 4.58%. in October. Assuming the November and December increases to the cash rate are passed on in full, this could take average new variable rates to 5.08%.”
Owen said an average variable rate of 5.08% may create a “sticker shock” for those rolling off low fixed-term rates, noting average fixed-term rates of three years or less bottomed out at 1.95% for owner-occupiers.
“At 3.1%, the cash rate has now entered the lower bound of major bank forecasts for a peak in the cash rate, with forecasts made in October ranging from 3.1% to 3.85%,” she said. “The higher rate environment will test housing market conditions in 2023, when the majority of outstanding fixed-term mortgages are expected to expire.”
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