The RBA took the cash rate another 50 basis points higher at the September board meeting, citing ongoing inflationary pressures amidst tightening labour market.  The cash rate setting, at 2.35%, is now at the highest level since January 2015, but still slightly below the pre-COVID decade average of 2.56%.

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Housing markets have reacted negatively to the rate hiking cycle, with capital city housing values down 4.5% since peaking shortly after the first lift in the cash rate on May 5th.   It is reasonable to expect higher interest rates will flow through to less housing activity as borrowing capacity diminishes and sentiment remains low, placing further downwards pressure on housing prices.

CoreLogic’s estimate of national home sales over the three months to August was tracking 14.8% lower than the same period a year ago, highlighting that housing demand has already been dented by the recent cycle of rate hikes. As we move into spring, there is good chance buyer demand will continue to taper as interest rates rise, leading to higher advertised inventory levels amid more challenging selling conditions.

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On the assumption that today’s cash rate rise will be passed on to mortgage rates in full, the average variable mortgage rate for a new owner occupier loan is set to rise to around 4.51%, up from 2.41% in April.  For an existing owner occupier loan, variable mortgage rates will average approximately 4.99%, adding roughly $1,093 per month to P&I mortgage repayments on a $750k loan compared with April levels.

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A consideration of housing prices isn’t part of the RBA’s mandate, so it’s likely the RBA will be prepared to look through the peripheral noise of falling home values, focussing on inflation and labour market conditions.  However, the housing sector does play an important role in the broader economy due to the large proportion of wealth tied up in the housing asset class (57% of household wealth is held in housing assets), along with the large proportion of Australian workers employed within the property sector either directly or indirectly.  As housing prices trend lower, Australians feel less wealthy which could flow through to lower confidence and diminished spending.

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The good news is the RBA believes inflation will find a peak towards the end of the year, implying the cash rate should stabilise as inflation reduces back to 2-3%.  Potentially the cash rate could retrace some of the hikes through the second half of next year or into 2024.  In fact, this is the trajectory that financial markets are now pricing in, with the ASX cash rate futures indicating a peak in the cash rate at 3.9% by July/August of next year followed by an easing back to 3.7% by the end of 2023. As the cash rate finds a ceiling, that will probably be the cue for housing values to find a floor.