The Reserve Bank prepares to offer another large interest rate increase

Home prices are forecast to fall as much as 20 percent from the top of the market as the Reserve Bank prepares to deliver another sizeable interest rate hike on Tuesday.

While home prices rose by a national average of 22 percent last year, the largest annual increase since 1989, a major correction is already underway.

That doesn’t mean prices will fall another 20 percent from now, but it does mean last year’s gains are likely to be eroded, if not wiped out, after back-to-back rate hikes.

The RBA is expected to raise rates by 0.50 percent, and analysis by RateCity.com.au found that the average borrower could be paying $760 more per month than before the hikes began in May.

For an owner-occupant borrower with $500,000 in debt, the total increase in their monthly payments could be $760, a 33 percent increase from the beginning of May.

For someone with $750,000 remaining on the loan, the total increase in monthly payments since May would be $1,140.

RateCity research director Sally Tindall said that if the RBA offers another two-fold increase, it will see the cash rate rise to its highest level in nine-and-a-half years.

“The average borrower could soon be paying an extra $760 a month in interest to their bank, at the same time their gas and grocery bills continue to rise,” he said.

“While the RBA governor has indicated that the board is looking to reduce the size of increases in the coming months, based on incoming data, October is unlikely to be the meeting where he takes his foot off the gas.

There is also a lag between the time the RBA announces a rate hike and the time homeowners are forced to pay more.

“You would think that he has successfully pulled off five RBA hikes when in reality he has only pulled off three, possibly even two,” said Ms Tindall.

“If you can, start making these higher payments now, so you know ahead of time that you can afford them. If you can’t, start cutting back today,” she said.

There are fears that further cash rate hikes could plunge Australia into recession territory as global economic uncertainty looms.”

Experts also warn that Australians are more vulnerable to interest rate hikes than other parts of the world due to higher levels of household debt; a larger proportion of adjustable-rate mortgages and a large proportion of newly fixed mortgages are due next year.

“Assuming the cash rate tops out around 2.85%, as we expect, average prices are likely to fall 15-20% top to bottom with the trough being reached around the September quarter. of next year,” said AMP Chief Economist Shane Oliver. .

“We expect national average property prices to fall further over the next 9-12 months, reflecting: poor affordability; increased fixed mortgage rates; further RBA rate hikes pushing up variable rates; high inflation that makes it even more difficult to save for a deposit; higher supply as we see an increase in distressed sales, particularly as fixed-rate borrowers move to much higher interest rates through 2023 and as the economy slows; and a continued shift in consumer spending toward services as reopening continues, which will reduce demand for housing.”

And at least some of the help governments provide to first-time home buyers, including increased access to home deposit schemes, will ultimately help provide a floor for property prices.

But Oliver warns that if the cash rate rises to 4.1 percent, it would more than double average household interest payments and push total mortgage repayments (interest and principal) to record levels relative to household income. households and would generate 30 percent or so. price drop.

“On this front, though falling house prices, declining consumer confidence around recession levels and a flow to slower consumer spending will ultimately help limit how much the RBA will have to raise. cash rate, so we see the cash rate peak being well below 4.1%, but the risk to our cash rate forecast is to the upside,” he said.

“There are two main risks to the upside. The first would be if inflation declines rapidly, allowing the RBA to start easing soon. This seems unlikely. The second would be a rapid spike in immigration that would exacerbate the housing shortage evident in very tight rental markets.”

According to the PropTrack Home Price Index, national home price declines leveled off to some extent in September in the midst of the spring selling season.

The report found that although price declines were widespread, the pace of declines slowed.

Nationwide, home prices fell 0.19 percent in September, the smallest price drop since prices began to decline in April this year.

In capital cities, prices fell 0.22 percent. However, prices have risen 46.6% since the start of the pandemic.

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