Warning of More Rates Pain as Inflation War Rages On

The central bank has lifted rates for the 10th month straight, triggering fresh concern about the worsening impact of ballooning loan costs and shrinking borrowing capacity on the struggling development industry.

Proving the pundits correct, the Reserve Bank on Tuesday raised its cash rate target another 0.25 of a percentage point to 3.6 per cent—its highest level since 2012—as it fought to avert a “wage-price spiral” amid decades-high inflation in the Australian economy.

The bank also warned borrowers of more pain to come.

“It will be some time before inflation is back to target rates,” it said.

“The board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target  (2-3 per cent) and that this period of high inflation is only temporary.”

Developer Urbex Realty general manager Craig Covacich said that as a result of consistent interest rate rises, sales volumes have softened by up to 70 per cent.

“The unstable construction sector is mothballing projects and tighter development finance hurdles are placing pressure on equity contributions,” Covacich told The Urban Developer.

Real Estate Institute of Queensland chief executive Antonia Mercorella said it was concerning the interest rate rises were happening at such a rapid-fire pace.

“You’ve got to be wondering when the RBA might stop and think whether this approach is still the right course of action because while they are aiming to reduce inflation via these consistent rate hikes, it’s clearly not working.”

Mercorella said the RBA had stated inflation was largely being driven by supply-side matters.

“Energy costs, lack of new land supply and natural disaster impacts are all large contributors to inflation,” she said.

“Interest rate increases do nothing to address the cost-of-living crisis that these factors are driving.

It should not be left to mortgage holders to do all the heavy lifting, she said.

“It’s time for all levels of government to address the productivity constraints on the economy that are actually meaningfully driving inflation. New roads, dams, increased land supply and natural-disaster proofing key infrastructure all need to be addressed urgently,” Mercorella said.

PropTrack senior economist Eleanor Creagh said, however, that there were signs that the RBA’s actions were working.

“The substantial tightening that has been pushed through already has quickly rebalanced the housing market, with prices falling from peak levels in most parts of the country,” Creagh said.

“Prices nationally fell for nine consecutive months and are now sitting 3.9 per cent below their March peak, despite bouncing 0.18 per cent in February.”

Tight supply contributed to the slight rise in home prices throughout February, she said.

“But with additional rate rises on the horizon, borrowing costs will continue to increase and maximum borrowing capacities will be further reduced, with home prices likely to continue declining as interest rates move higher.

“The downward pressure from rate rises will also be countered to a degree by positive demand effects that stem from tight rental markets and rental price pressures, rebounding foreign migration, stronger wages growth, and over the long run, housing supply pressures.

“Planning constraints are starving supply which is adding fuel to the housing supply and affordability crisis but once rates stabilise with inflation under control the market will be grappling for stock.”

▲ After 350 basis points of tightening to date, maximum borrowing capacities have dropped by around 30 per cent. according to PropTrack.

To combat the current challenges, Covacich said Urbex was undertaking controlled product releases within its portfolio aligned to market demand.

“And we are paying a lot of attention to developing lot grids that facilitate housing typologies that addresses the housing affordability crisis,” Covacich said.

“A diverse product offering aligned to a variety of market segments’ future trigger points is essential.”

The market was facing an “acute problem”, Covacich said.

“The lack of supply and good equity buffers earnt for most homeowners will underpin a significant correction in values or the need to sell your home in the current market.

“Once new housing and apartment construction cost stabilise following the supply-chain issues being resolved, I form the view that market demand will ricochet and grapple for product [will provide] an opportunity for developers.

“However this will take time which in the short term creates an acute affordability crisis in both rental and home ownership which federal, state and local governments need to work closely with developers to solve.

“Wage growth has simply not followed the upward trajectory in housing values and rental rates—this will place a lid on borrowing capacity to purchase—it’s an affordability storm in the making.”