Rates Rise Again with More Mortgage Pain Flagged

The Reserve Bank of Australia has raised the cash rate again for the ninth time since mid-2022 in a bid to combat rising inflation. 

RBA governor Phillip Lowe said that the priority of the RBA’s board was to return inflation to a set level.

“High inflation makes life difficult for people and damages the functioning of the economy,” Lowe said.

“And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later.”

An increase of 25 basis points for the cash rate target to 3.35 per cent was decided at the RBA’s meeting today.

The interest rate on exchange settlement balances was also raised by 25 basis points to 3.25 per cent.

CPI inflation over the December quarter was 7.8 per cent, the highest it has been since 1990.

“Global factors explain much of this high inflation, but strong domestic demand is adding to the inflationary pressures in a number of areas of the economy,” Lowe said.

“Inflation is expected to decline this year due to both global factors and slower growth in domestic demand.” 

But to get there Lowe also announced that it was very possible that future rate rises will be needed.

“The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary,” Lowe said.

“In assessing how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.”

Proptrack economic research director Cameron Kusher said this was a record.

“At the beginning of May 2022, official interest rates were sitting at 0.1 per cent,” Kushner said.

“By the end of 2022, the cash rate had increased to 3.1 per cent and today, the Reserve Bank lifted rates another 25 basis points.

“As a result of the fastest and most significant interest rate tightening cycle in many decades, the cash rate is the highest it has been since September 2012.”

The main concern is how the rates rise will affect the housing market.

New loan commitments for housing dropped for the eleventh consecutive month in December, according to the Australian Bureau of Statistics with experts stating that high interest rates, the subsequent higher cost of living and higher mortgage repayments all deterred people from entering the housing market. 

Lowe said in the official statement, “The Board recognises that monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments.

“There is uncertainty around the timing and extent of the expected slowdown in household spending. 

“Some households have substantial savings buffers but others are experiencing a painful squeeze on their budgets due to higher interest rates and the increase in the cost of living.”

Finder’s consumer research head, Graham Cooke, said the average mortgage holder will have to pay $12,000 more in 2023 than they did at the start of 2022.

“Australians with the average loan size of around $600,000 will be paying $1000 more per month compared to what they were paying in April last year,” Cooke said.

“That’s a significant amount of extra money to allocate towards your mortgage every month—especially when household budgets are already stretched thin.”

Finder’s RBA Cash Rate Survey found that 61 per cent of the experts surveyed believed that lenders would raise their interest rates by more than the RBA rate increase.

Income needed to service the median house price

_{Source: Analysis of Corelogic October 2022 data Finder} 

It also stated that the raise by 25 basis points would mean that a household in Sydney would need an income of $255,000 a year to afford a $1.3-million house. 

Prospective homeowners will need a combined income of more than $174,000 to afford a $888,000 house in Melbourne, and almost $148,000 in Brisbane for a $752,000 house.

In terms of apartments, to buy one at the median unit price of $740,000, a household in Sydney will need a minimum income of more than $145,000. 

Hopeful homeowners will need $119,000 in Melbourne and more than $92,000 in Brisbane.

The Australian Bureau of Statistics states that Australia’s median personal income is $52,338 with the median annual household income just $90,792.

Income needed to service the median unit price

_{Source: Analysis of Corelogic October 2022 data by Finder} 

“With the cost of living on the rise and salaries failing to keep pace, homeownership—particularly in the capital cities—is slipping further out of reach for many,” Cooke said.

“Prospective buyers are looking at borrowing significantly more than pre-pandemic levels, and with higher interest rates.”

Kushner predicted that house prices would fall further. 

“With borrowing costs continuing to rise and the subsequent reduction in borrowing capacities, property price falls are likely to continue and accelerate in 2023, with the more expensive cities likely to see the largest price falls,” Kushner said.

“Nationally, we are forecasting prices to fall by a further 7 to 10 per cent by the end of this year.

“We anticipate these further interest rates rises will push prices lower, however, a lower interest rate peak and earlier than expected interest rate cuts could ease price falls.”