recession risks, housing downturn after third rate hike

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 in Australia, analysts and economists say. 

The Reserve Bank of Australia raised interest rates for the third time in a row on Tuesday. 

Joining central banks around the world, the bank lifted the cash rate by 50 basis points to 1.35% after two previous rate hikes this year of 25 and 50 basis points, as the RBA tries to bring inflation under control. 

Anticipating a “peak to trough” fall in house prices between 15% and 20% in capital cities in 2023, AMP Australia Senior Economist Diana Mousina told CNBC’s “Street Signs” on Tuesday the size of that fall would be a “big hit” to households. 

“For many decades in Australia, we’ve seen some small corrections, but that [15%-20%] will be quite a decent fall,” she said. 

“We have obviously had a very big run-up in home prices over the past two-and-a-half years of the pandemic because we’ve had such a strong housing market, lots of demand as well for the regions in Australia.” 

“It will just be a bit of a hit to households … because of the wealth effect that comes through when home prices decline.”

RBC Capital Markets Chief Economist Su-Lin Ong told “Street Signs Asia” she was expecting a peak-to-trough 19% drop in housing prices and that it could serve a “reasonably significant” blow to consumer confidence. 

But she also said these predicted price declines are smaller than the nearly 40% increase in house prices in the three years since 2019. 

That 40% growth — mainly in major cities — in the three years since 2019 is outsized compared with other boom periods including the recent five-year period between 2012 and 2017 when house prices rose as much as 50% in places like Sydney and Melbourne, according to property data providers such as Corelogic.

This year’s interest rate increases marked the first rate hikes in 11 years, and more are expected. Economists predict that the cash rate could rise to anywhere between 2.5% and 2.85%.

House prices fell for the first time in February this year after rising fervently over the pandemic, and price rises for houses were sharper 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…

Tim Lawless

research director, Corelogic

House prices have risen quickly in the past three years amid ultra-low interest rates maintained by the RBA in its effort to cushion the economic downturn of the pandemic. Low rates drove up house purchases, mainly among Australian residents and first-time home buyers as opposed to investors or overseas buyers. 

But all that is changing now as rates start to rise. 

National auction clearance rates and the number of auctions — barometers for the buoyancy of the housing market in Australia — have started to fall. 

There were fewer auctions in the past week compared to the same time last year, according to Corelogic. Only 55% of those listed were successful compared to 72% in the same period last year, data showed.

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.

William West | Afp | Getty Images

“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 and become more widespread,” Tim Lawless, research director at Corelogic said in a note last week, during the firm’s monthly price update. 

Higher interest rates could put a dent in dwelling investments and “bring the economy close to recession” next year, said Capital Economics Senior Australia & New Zealand Economist Marcel Thieliant.

But, Theliant was more sanguine about consumer spending pointing out that household savings rate have been sound. 

Lawless wasn’t so sure given that Australian household debt reached record highs this year, adding that 77% of that debt tied to housing. 

“Households are likely to be all the more sensitive to rising interest rates due to record levels of debt held by the sector,” he said. 

However, the National Australia Bank — which expects a peak-to-trough 18% price fall in housing prices — does not predict a “disorderly” downturn as Australia doesn’t have an oversupply of houses. 

The flipside is that with interest rates rising, housing affordability will worsen despite falling property prices which remain one of the highest in the world, Moody’s Investors Service said.

The latest data from the Australian Bureau of Statistics says median house prices in the two biggest cities of Sydney and Melbourne have risen. In the first quarter of this year, prices in Sydney rose 16% year-on-year to reach $1.25 million Australian dollars ($850,000), while those in Melbourne increased by 9% to nearly AU$1 million ($680,000) in the same period.

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