Will the housing market continue to defy the impacts of rate hikes?

The Reserve Bank of Australia (RBA) has made its 12th rate hike in the current tightening cycle, but will the property market continue to defy the impacts of these rate increases?

CoreLogic Australia head of research Eliza Owen said the housing market dichotomy is adding uncertainty around interest rate decisions.

“CoreLogic’s Home Value Index accelerated in May, rising 1.2% nationally and while established home and residential land values do not directly feed into the CPI housing indicator, there may be upside risk to inflation from rising home prices due to potential wealth effects,” she said.

“The minutes of the May board meeting noted rising asset prices had prompted the RBA to revise forecasts for consumption growth a little higher, and the June statement acknowledges house prices are rising again.”

Over the short term, Ms Owen said the June rate rise may take some steam out of the housing market — for the past two decades, there has been a strong negative correlation between movements in the RBA cash rate and the CoreLogic Home Value Index.

“Like many economic trends since the pandemic, the housing market has defied expectations,” she said.

“With continued strong demand from a surge in overseas migration, a slow return to pre-pandemic household size in the capital cities, and persistently low levels of advertised supply, the June rate hike may only serve to take some steam out of the recovery trend in housing values, rather than reverse recent gains.”

Impact of rate hikes starting to emerge

Housing Industry Association (HIA) chief economist Tim Reardon said the current home building activity already reflects rate increases a year ago.

“This recent decision is going to see an ongoing slowdown in home building, while demand for new homes continues to grow,” he said.

Mr Reardon said the manifestation of the impacts of the rate hikes can be seen in the following:

• The 50% decline in new home sales since the first increase in the cash rate.
• The number of loans issued for the purchase or construction of new home fell to its lowest level since September 2008.
• First-home buyer loans declined to six-year lows.
• Detached house approvals are around the lowest level in the decade.
• Multi-unit approvals are barely a third of the level they were in their 2016 peak.

Mr Reardon said the large pool of work yet to commence construction in May 2022 has obscured the adverse impact of rate rises to date.

“The lags in this cycle are significantly longer than previous cycles,” he said.

While the impacts are starting to emerge, Mr Reardon said it will take a further 12 months for this slowdown to be apparent in work on the ground, and the wider economy.

 “This will see the number of homes commencing construction slow, as population growth accelerates. 

“In addition to the increase in rates, home building is also set to decline as regulatory costs continue to add to the cost of new home construction. If governments continue to make building new homes more expensive, fewer new homes will be built.

Interest rate to damage confidence

For Real Estate Institute of Queensland (REIQ) COO Dean Milton, the recent rate hike not only impacts potential buyers but also the confidence of property investors who are already facing regulatory and tax uncertainties.

“Building approvals in Queensland for the year-to-date in April were 2,607 below last year, showing the damaging impact interest rate rises are having on confidence,” he said.

“Further, lending indicators show a 23% decline in loans to owner occupiers this financial year, and a decline of 27% in investor activity — returning the housing market to the early days of COVID.

Mr Milton said it will be concerning to see the potential recessionary impact of these interest rate rises.

“This rate rise will further the hardship of tenants, especially those on low incomes, when striving to enter home ownership, both saving the deposit and simply qualifying for a loan,” he said.

“Accordingly, we call on APRA to reduce their serviceability buffer back to pre-December 2021 levels, as we need more investors to bring rentals to the market and opportunity for tenants to realise their dreams of home ownership.”

Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Important Information and Comparison Rate Warning

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