RBA’s clue that interest rates will keep rising as property prices suffer steepest drop since 1983

The Reserve Bank of Australia has given some chilling clues it will keep raising interest rates even after Tuesday’s forecast rate rise, as property prices fall at the fastest pace in almost 40 years.

The Big Four banks are all expecting the cash rate to rise by another 0.5 percentage points on Tuesday – which would take it to a seven-year high of 2.35 per cent, up from an existing six-year high of 1.85 per cent.

Should rates jump by 0.5 per cent, a borrower with a typical $600,000 mortgage would see their monthly repayments climb by $173. Interest rates are already rising at the steepest pace in almost three decades. 

The RBA last month raised rates by 50 basis points and strongly hinted in its August meeting minutes there was more pain to come for home borrowers – with property prices already suffering the steepest monthly decline since early 1983.

‘Given high inflation, the resilient economy and the tight labour market, and taking into account the risks, members agreed it was appropriate to continue the process of normalising monetary conditions,’ it said.

‘The board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path.’

RBA Governor Philip Lowe has previously suggested interest rates would need to rise above 2.5 per cent to be above the neutral level – where the aim of monetary policy would be to slow down economic activity.

The Commonwealth Bank, Australia’s biggest home lender, is expecting a 2.6 per cent cash rate by November while ANZ is forecasting a 10-year cash rate of 3.35 per cent on Melbourne Cup day.

The era of the record-low 0.1 per cent cash rate ended in May, with rate rises every month since then adding up to 1.75 percentage points – the steepest since 1994.

The severe monetary policy tightening has already affected the property market with CoreLogic data showing a 1.6 per cent decline in national house and unit prices in August – the steepest monthly decline since January 1983.

National home prices last month dropped to a median level of $738,321.

But even with a 20 per cent deposit factored in, a $590,657 mortgage would be beyond the reach of a full-time worker earning an average $92,000 salary.

In April, before the RBA raised rates for the first time since November 2010, someone earning $96,300 a year could borrow $600,000, a Canstar analysis showed.

But that same potential borrower would now only be able to borrow $500,000.

The banks have, since November, been required to assess a borrower’s ability to cope with a three percentage point increase in variable mortgage rates.

This means four straight rate rises – with a likely fifth on the way for September – are causing home prices to fall, with the banks’ ability to lend constrained.

House prices fell in every capital market except Darwin in August. 

Sydney’s median house price last month plunged by 2.6 per cent, the steepest property market decline since August 1985, taking it back to $1,302,635 in a city where borrowers are much more sensitive to rate rises.

Melbourne prices fell 1.5 per cent to $948,879.

Adelaide, until recently Australia’s strongest property market, suffered a 0.2 per cent drop in August, taking the median house price down to $707,364.

Perth, which had also defied the downturn, also went backwards by 0.2 per cent, with its mid-point house prices falling to $588,308.

Brisbane continued to be Australia’s strongest performing big city market even after rates rose but last month, prices fell by 2.1 per cent to $864,149 – marking the sharpest fall in 42 years of records.

Hobart prices fell 1.7 per cent to $772,443 – the steepest drop since August 1998.

Canberra values dropped 2 per cent to $1,033,377 – the most severe since October 1996 after former prime minister John Howard’s new government retrenched public servants.

Regional markets, which benefited from professionals being able to work from home, suffered a 1.5 per cent fall in August – the sharpest since November 1989 when interest rates were at 17 per cent.

The regional house price of $615,712 is still more expensive than Perth or Darwin, with coastal values pulling up the mid-point.

Commonwealth Bank head of Australian economic Gareth Aird said that while borrowers could cope with the May, June and July rate rises, the August rate rise finally bit.

‘Up until July most borrowers on floating rate mortgages had felt no impact from a cash flow perspective,’ he said.

‘This enabled them to continue to spend as they were previously, thus the official spending data has been strong.’

Mr Aird said the fastest pace of rate increases in almost three decades meant some borrowers would now struggle to adjust. 

‘The rapid pace at which the RBA has tightened policy, overlaid with a full appreciation of the lags between rate hikes and the cash flow impact on a home borrower, means there’s a degree to which the RBA board is flying blind,’ he said.

‘Many households with mortgages will need to adjust their spending patterns over the period ahead as the lagged impact of rate hikes negatively impacts their cash flow.’

Inflation in the year to June surged by 6.1 per cent, the fastest pace since 1990 when the one-off effects of the GST introduction in 2000 was excluded.

Both the Reserve Bank and Treasury are expecting the consumer price index to hit a 32-year high of 7.75 per cent later this year.