Two or even three more Reserve Bank interest rate hikes would be “devastating” for the property market but still leave housing more unaffordable than ever as higher borrowing costs trump lower prices, experts say.
The RBA’s monetary policy board is widely expected on Tuesday afternoon to announce an increase in its cash rate to 4.6%, from 4.35%, in a decision that will add another $100 to the monthly mortgage interest bill on a $700,000 loan.
A number of analysts are tipping a further interest rate rise – the fifth this year – on Melbourne Cup day. Financial markets are even pricing in a 60% chance of a sixth rate increase by mid-2027.
As petrol prices push towards $2.40 a litre, Shane Oliver, AMP’s chief economist, said two or three more rate hikes would be “overkill” given the already weakened state of the economy and families’ finances.
A rate hike on Tuesday would push the cash rate to its highest level since late 2011, and a further increase at the next meeting in November would push it to 4.85% – the highest since just before the GFC, Oliver said.
Another hike to 5.1% “is going to cause major problems for households with mortgages,” he said, pointing out that debt burdens have become substantially larger over the past two decades.
“And it would be devastating for the property market. The higher you go [with the cash rate] the greater the chance you hit a tipping point, and instead of a 10% decline in home prices, you get more like a 15-20% drop.”
Tom Devitt, senior economist at Housing Industry Australia, said the HIA’s national affordability index hit the lowest in history at the end of June.
The silver lining from falling home values is that it makes it easier for first-time buyers to get into the property market.
Devitt said he had expected affordability to improve over the second half of this year and perhaps into 2027 – but that was predicated on the RBA not pushing borrowing costs higher.
Tuesday’s anticipated rate hike, alongside the prospect of more to come, had changed the calculus.
“In this cycle we now don’t see any improvement in affordability at all,” he said.
Taylor Nugent, a senior economist at NAB, said the prospect of more interest rate hikes suggested property values would fall further and for longer than anticipated.
Beyond prices, Nugent said the fundamental issue with the housing market – too many people chasing too few homes – was evident in an ongoing lack of rental properties and climbing rents.
“Housing affordability is a challenge not just for people trying to buy, but people renting as well,” he said.
