The Reserve Bank of Australia (RBA) is now widely tipped by economists to increase the cash rate in June.
Shane Oliver of AMP Capital believes the RBA may adopt a more aggressive approach to interest rates at the start of the monetary policy tightening cycle, and a rate rise of 0.4% in June is possible.
Oliver expects the cash rate to be 1% at the end of 2022 (versus 0.1% currently), and he warns that Australian house prices could fall more quickly in response:
“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”, [Shane Oliver said].
“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”…
“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,” [Nicola Powell, Domain’s chief of research and economics] 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.”
If Shane Oliver is anticipating a 10% to 15% decline in Australian house prices on the back of a relatively small increase in interest rates, what would happen if the futures market’s forecast of a 3.25% rise in the cash rate by August 2023 came to fruition?
Futures market forecasts 13 interest rate hikes in only 16 months?
This would see Aussie mortgage repayments surge by 42%, adding around $1,200 a month to mortgage repayments on the median-priced Australian home ($1,800 for Sydney borrowers):
Mortgage repayments would surge 42% if the futures market’s interest rate projection came to fruition.
Such extreme interest rate hikes would very likely crash both house prices and the economy, which is why the RBA would be very unlikely to lift rates so far.
The CBA’s prediction of a 1.25% peak in the cash rate seems far more realistic and is in line with my thinking.
