Risks of recession, real estate downturn after third rate hike

The negative impact of interest rate hikes on Australian house prices, household spending and the volume of home investment could hurt consumer confidence and increase the likelihood of a recession in Australia, analysts and economists say.

The Reserve Bank of Australia hiked interest rates for the third straight month on Tuesday.

The bank, which has joined central banks around the world, raised interest rates by 50 basis points to 1.35% after two earlier rate hikes this year of 25 and 50 basis points as the RBA tries to bring inflation under control.

Diana Mousina, senior economist at AMP Australia, expected house prices to fall between 15% and 20% in capital cities in 2023, telling CNBC’s Street Signs on Tuesday that the magnitude of that fall would be a “huge hit”. would households.

“Over many decades we’ve seen some small corrections in Australia, but this [15%-20%] It’s going to be a pretty decent fall,” she said.

“Obviously we’ve had a very strong rise in house prices in the last two and a half years of the pandemic because we’ve had such a strong housing market and great demand for the regions in Australia as well. ”

“It will only be a small blow to households…because of the wealth effect that occurs when house prices fall.”

RBC Capital Markets chief economist Su-Lin Ong told Street Signs Asia she expects house prices to fall 19% peak to trough and that it could mean a “quite significant” hit to consumer confidence.

But she also said those projected price falls are smaller than the nearly 40% rise in house prices in the three years since 2019.

That 40% growth — mostly in big cities — in the three years since 2019 is outrageous compared to other booms, including the most recent five-year period between 2012 and 2017, when house prices in places like Sydney and Melbourne rose by as much as 50%. according to real estate data providers such as Corelogic.

This year’s rate hikes were the first in 11 years and more are expected. Economists forecast the cash rate could rise to between 2.5% and 2.85%.

House prices fell in February this year for the first time after rising sharply during the pandemic, and house price increases have been stronger than apartments.

Given that inflation is likely to remain stubbornly high for some time to come, and interest rates are expected to rise significantly in response, it’s likely that the fall in property values ​​will continue to gather momentum…

Tim Lawless

Research Director, Corelogic

Home prices have risen rapidly over the past three years amid ultra-low interest rates, which the RBA has maintained in its efforts to cushion the pandemic’s economic downturn. Low interest rates spurred home buying, mainly among Australian residents and first-time home buyers as opposed to investors or overseas buyers.

But all of that is changing now that interest rates are starting to rise.

National auction eviction rates and the number of auctions – a barometer of the buoyancy of the property market in Australia – have begun to fall.

According to Corelogic, there were fewer auctions last week than at the same time last year. Data showed that only 55% of those listed were successful, compared to 72% in the same period last year.

The Reserve Bank of Australia raised its policy rate by 50 basis points to 1.35% in July 2022, marking a 125 basis point hike since May 2022 and the fastest series of moves since 1994.

Wilhelm West | AFP | Getty Images

“Given that inflation is likely to remain stubbornly high for some time to come, and interest rates are expected to rise significantly in response, it’s likely that the decline in property values ​​will continue to gather momentum and become more widespread,” says Tim Lawless , director of research at Corelogic, said in a note last week during the company’s monthly price update.

Higher interest rates could dampen investment in residential real estate and bring the economy “close to recession” next year, said Marcel Thieliant, senior economist Australia & New Zealand at Capital Economics.

But Theliant was more optimistic on consumer spending, noting that the household savings rate is solid.

Lawless wasn’t so sure as Australia’s household debt hit record highs this year, adding that 77% of that debt is related to housing.

“Households are likely to be all the more sensitive to rising interest rates given the sector’s record level of debt,” he said.

However, the National Australia Bank expects prices to fall by 18% from peak to trough in house prices – does not forecast a “disorderly” downturn as Australia does not have an oversupply of homes.

The downside is that as interest rates rise, housing affordability deteriorates despite falling home prices, which are among the highest in the world, Moody’s Investors Service said.

The latest data from the Australian Bureau of Statistics says median house prices have risen in the two largest cities, Sydney and Melbourne. In the first quarter of this year, prices in Sydney rose 16% year-on-year to AUD 1.25 million ($850,000), while prices in Melbourne rose 9% to almost AU$ 1 million ($680,000) over the same period.