Aus housing: rising rates may soften market

Globally, ongoing supply chain issues relating to the pandemic and subsequent lockdowns, particularly in Beijing and Shanghai, as well as the awful war in Ukraine have added to the global impetus for inflation. But we're now seeing domestic inflation really starting to pick up with headline inflation now at 5.1 per cent and the trimmed mean measure at 3.7 per cent.

“When interest rates start to rise, CoreLogic expects growth in housing to come down. That will probably be the factor that ticks most of Australian housing markets into a downswing phase.” – Eliza Owen

I recently caught up with CoreLogic’s Head of Research for Australia Eliza Owen at the launch of the latest ANZ CoreLogic Housing Affordability report where we discussed the relationship between inflation and interest rates - and what this may mean for house prices.

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After the higher than anticipated forecast update, ANZ Research expects the Reserve Bank of Australia (RBA) to move quickly on the official cash rate (OCR). We expect the RBA to continue to raise rates every month until mid-2023, lifting the OCR to around 2.25 or 2.5 per cent. This is clearly a steep trajectory and will have broader implications for the economy and for housing.

According to Eliza, CoreLogic data show an historically inverse relationship between the home value index and the OCR.

“When interest rates start to rise, CoreLogic expects growth in housing to come down,” she explained. “That will probably be the factor that ticks most of Australian housing markets into a downswing phase.”

Eliza pointed to modelling of an expected 200 basis point rise in the OCR which the RBA thinks could create a 15 per cent decline in real property prices.

“For a lot of people who've been struggling to get into the housing market, that's a moment where maybe you… think all prices are going to come down,” she says. “What might be important to consider for first home buyers is… this is about an increase in interest costs as well.”

This means even if deposit costs, loan sizes and property prices are lower, the cost of servicing the mortgage could see buyers spending more money overall.

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Felicity Emmett is Senior Economist at ANZ