Why you shouldn’t expect interest rates to stop climbing any time soon, even after ANOTHER hefty jump on Tuesday – as home prices suffer their sharpest drop in over 40 years The Reserve Bank of Australia has hinted at more interest rate hikes in 2022
On Tuesday, the four largest banks anticipate another 0.5 percentage point rate increase.
September increase would see cash rate hit a seven-year high of 2.35 per cent
The RBA stated in its August meeting minutes that it aimed to “normalize monetary conditions.”
In August, national home prices declined 1.6%, the largest decline since early 1983.
The Reserve Bank of Australia has given ominous hints that it would continue to raise interest rates even after Tuesday’s anticipated rate hike, as house prices decline at the quickest rate in nearly four decades.
The Big Four banks anticipate that the cash rate will increase by a further 0.5 percentage points on Tuesday, bringing it to a seven-year high of 2.35 percent, compared to its current six-year high of 1.85 percent.
If interest rates increased by that much, a borrower with a typical $600,000 mortgage would see his or her monthly payments increase by $173. Interest rates are currently increasing at the highest rapid rate in over three decades.
The RBA raised rates by 50 basis points last month and strongly implied in its August meeting minutes that there was more pain to store for home borrowers, despite the fact that property values were already experiencing the sharpest monthly decrease since the beginning of 1983.
“Given strong inflation, a robust economy, and a tight labor market, and taking into account the risks, members felt it was prudent to continue the process of normalizing monetary conditions,” the document stated.
The board anticipates taking additional moves in the coming months to normalize monetary conditions, but it is not on a predetermined course.
As housing values fall at the quickest rate in nearly four decades, the Reserve Bank of Australia has signaled it will continue to raise interest rates in 2018. (pictured is a Melbourne house)
RBA Governor Philip Lowe has stated in the past that interest rates would need to rise above 2.5% to be above the neutral level, where the objective of monetary policy would be to reduce economic activity.
August home prices fall in nearly EVERY major city market.
SYDNEY: a decrease of 2.6% to $1,302,635
MELBOURNE: a decrease of 1.5% to $948,879
BRISBANE: a decrease of 2.1% to $864,149
ADELAIDE: decrease of 0.2% to $707,364
PERTH: A decrease of 0.2% to $588,308
HOBART: a decrease of 1.7% to $772,442
Increasing by 1.1% to $592,183
CANBERRA: 2% decrease to $1,033,377
August statistics from CoreLogic based on median house prices
The Commonwealth Bank, Australia’s largest mortgage lender, anticipates a 2.6% cash rate by November, while ANZ predicts a 3.35 percent 10-year cash rate on Melbourne Cup day.
The era of the record-low 0.1% cash rate ended in May, and monthly rate increases since then have totaled 1.75 percentage points, the biggest increase since 1994.
The strong tightening of monetary policy has already had an effect on the housing market, with CoreLogic data indicating a 1.6% decrease in national house and unit prices in August – the largest monthly decline since January 1983.
Last month, the national median home price fell to $738,321.
Even with a 20% down payment, a mortgage of $590,657 would be out of reach for a full-time worker making the average annual wage of $92,000.
A Canstar research revealed that in April, before the RBA raised rates for the first time since November 2010, a person earning $96,300 per year could borrow $600,000.
However, the same potential borrower can now only borrow $500,000.
The banks have, since November, been required to assess a borrower’s ability to cope with a three percentage point increase in variable mortgage rates.
This means that four consecutive rate hikes, with a fifth projected for September, are driving a decline in housing prices and limiting banks’ ability to lend.
In August, house prices declined in every capital except for Darwin.
The RBA this month raised rates by 50 basis points and strongly hinted in its August meeting minutes there was more pain to come for home borrowers – with property prices already suffering the steepest monthly decline since early 1983 (pictured is Reserve Bank Governor Philip Lowe)
In a city where borrowers are significantly more susceptible to rate hikes, Sydney’s median house price dropped by 2.6% last month, the largest property market loss since August 1985, to $1,302,635.
Melbourne prices decreased by 1.5% to $948,879.
Adelaide, formerly Australia’s strongest real estate market, experienced a 0.2% decline in August, bringing the median house price to $707,364.
Perth, which had also weathered the recession, also retreated by 0.2%, with median home prices dropping to $588,308.
Even after interest rates increased, Brisbane remained Australia’s best-performing major city market, but prices fell by 2.1% to $864,149 last month, marking the steepest decline in 42 years of records.
Hobart prices declined 1.7% to $772,443, representing the largest decline since August 1998.
After the new government of former prime minister John Howard laid off public personnel, property values in Canberra decreased by 2 percent to $1,033,377, the steepest decline since October 1996.
Regional markets, which profited from the ability of professionals to work from home, experienced a 1.5% decline in August, the largest drop since November 1989, when interest rates were 17%.
The regional house price of $615,712 is still more expensive than those of Perth or Darwin, with coastal property values pushing up the median.
The era of the record-low 0.1% cash rate ended in May, and monthly rate increases since then have totaled 1.75 percentage points, the biggest increase since 1994. August had the largest monthly decrease in national home and unit values since January 1983, according to CoreLogic statistics (pictured is a Melbourne auction in April)
Gareth Aird, the head of Australian economics at Commonwealth Bank, stated that while borrowers were able to withstand the rate increases in May, June, and July, the August rate increase eventually bit.
‘Until July, the majority of borrowers with adjustable-rate mortgages had not experienced any cash flow impact,’ he said.
‘This enabled them to continue to spend as they were previously, thus the official spending data has been strong.’
Mr. Aird stated that the most rapid rate hikes in over three decades would make it difficult for certain borrowers to adjust.
“The quick pace with which the RBA has tightened policy, coupled with a thorough grasp of the lags between rate hikes and the cash flow impact on home borrowers, implies that the RBA board is flying blind to some extent,” he added.
As the delayed impact of rate hikes has a negative impact on their cash flow, many people with mortgages may need to change their spending habits in the coming years.
Excluding the one-time effects of the introduction of the Goods and Services Tax (GST) in 2000, the inflation rate for the year ending in June increased by 6.1%, the highest rate since 1990.
Later this year, the Reserve Bank and Treasury anticipate the consumer price index to reach a 32-year high of 7.75%.
What another 0.5 percentage point rate increase in September will entail
$50000: An increase of $145 to $2,472 from $2,327
$600,000: $173 increase to $2,966 from $2,796.
$700,000: An increase of $202 to $3,460 from $3,258.
$800,000: $231 more at $3,955 than $3,724
$9,000,000: $260 increase to $4,449 from $4,189.
$1,000,000: $289 more at $4,943 than $4,654
A Commonwealth Bank variable loan for a borrower with a 20% deposit would increase to 4.29 percent from 3.79 percent if the cash rate increased by 0.5 percentage points to 2.35 percent from 1.85 percent.