Recession risks, housing decline after the third rate hike

Analysts and economists say the negative impact of higher interest rates on Australian house prices, household spending and the volume of housing investment could hurt consumer confidence and increase the likelihood of a recession in Australia.

The Reserve Bank of Australia raised interest rates for the third time in a row on Tuesday.

Joining central banks around the world, the bank raised the cash rate by 50 basis points to 1.35% after two previous interest rate increases this year of 25 and 50 basis points, as the Reserve Bank of Australia tries to control inflation.

Predicting a “peak-to-bottom” drop in house prices between 15% and 20% in capitals in 2023, Diana Musina, chief economist at AMP Australia, predicted that the scale of this decline would be a “huge blow” for households.

“For many decades in Australia, we have seen some small corrections, but this [15%-20%] It would be a decent fall.”

“Obviously we have seen a very big rise in home prices over the last two and a half years of the pandemic because we have a strong housing market, and a lot of demand also in the regions of Australia.”

“It would just be a small blow to families…because of the wealth effect that comes when home prices go down.”

Su-Lin Ong, chief economist at RBC Capital Markets said,street signs asiaIt was expecting a 19% drop in peak-to-trough home prices, and that it could be a ‘reasonably large’ blow to consumer confidence.

But it also said those projected price drops are less than the roughly 40% increase in home prices in the three years since 2019.

This 40% growth – mainly in major cities – in the three years since 2019 is huge compared to other booms including the last five-year period between 2012 and 2017 when house prices rose by as much as 50% in places like Sydney and Melbourne , according to proprietary data providers such as Corelogic.

This year’s rate hikes represent the first rate hikes in 11 years, and more are expected. Economists expect the liquidity ratio to rise to between 2.5% and 2.85%.

Home prices fell for the first time in February of this year after rising sharply due to the pandemic, and the rise in house prices was more severe than the rise in apartment prices.

Home prices have risen rapidly in the past three years amid ultra-low interest rates maintained by the Reserve Bank of Australia In its efforts to mitigate the economic downturn of the epidemic. Lower prices have led to higher home purchases, especially among Australian residents and first-time home buyers as opposed to overseas investors or buyers.

But that is all changing now as prices start to rise.

National auction clearance rates and the number of auctions – measures of the prosperity of Australia’s housing market – are beginning to decline.

There were fewer auctions last week than the same time last year, according to Corelogic. The data showed that only 55% of those listed passed, compared to 72% in the same period last year.

“Given inflation is likely to remain stubbornly high for some time, and interest rates are expected to rise significantly in response, it is likely that the rate of decline in housing values ​​will continue to gain traction and become more prevalent,” research director Tim Lawless said. Per Corelogic in a note last week, during the company’s monthly pricing update.

Marcel Thilliant, chief Australian and New Zealand economist at Capital Economics, said higher interest rates could curb housing investment and “put the economy close to recession” next year.

But Thielante was more optimistic about consumer spending, noting that the household saving rate was good.

Lawless wasn’t quite sure as Australian household debt reached record levels this year, adding that 77% of that debt is housing-related.

“Households are likely to be more sensitive to higher interest rates due to record levels of debt held by the sector,” he said.

However, the National Australia Bank – which expects home prices to fall by 18% from peak to trough No ‘disorderly’ recession is expected because Australia does not have an oversupply of homes.

The flip side, Moody’s said, is that with higher interest rates, housing affordability will only get worse despite lower property prices, which are still one of the highest in the world.

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