While recent polling suggests most Australians couldn’t care less about the Melbourne Cup, what makes the occasion memorable is today’s decision by the Reserve Bank (RBA) to increase the cash rate from 4.10% to 4.35%.
In light of the RBA’s recent warning that it has a “low tolerance” for a slower-than-expected fall in inflation, today’s rate hike comes as no surprise.
Today’s real winners are those searching for income from fixed interest, while home owners with a mortgage continue to bear the brunt of the pain.
After holding interest rates steady for four consecutive months, the central bank convinced itself that it was time to resume its tightening cycle on the back of recent evidence that (underlying) inflation was still trending higher.
The latest quarterly Consumer Price Index (CPI) report revealed inflation was up by 5.4% over the 12 months to the September 2023 quarter, significantly above the RBA’s target.
While the downward trend over the longer term is encouraging – with inflation falling from a 30-year high of 7.8% in December 2022 – the result was higher than expected and this is what concerns the RBA the most.
What’s driving an upward revision to the RBA’s inflation forecasts are ongoing signs of sticky services inflation and stronger-than-expected demand on the back of surging population growth.
“The board judged that an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe,” said RBA governor Michele Bullock.
“The weight of this information [since its August meeting] suggests that the risks of inflation remaining higher for longer has increased.”
Home price rebound
PropTrack senior economist Eleanor Creagh believes record levels of net overseas migration, a challenged rental market, limited housing stock, and a slowdown in the completion of new builds are offsetting the impacts of substantial rate rises and the slowing economy – with home prices continuing to lift.
The PropTrack Home Price Index shows that the home price rebound is firmly established, with prices hitting record highs in many markets in October.
National home prices reclaimed 2022’s price falls in their entirety last month, with the upswing continuing in October. Prices nationally climbed 0.36% month-on-month, bringing them up 4.93% so far this year after 10 consecutive months of growth.
Trouble for homeowners
A Canstar survey of 893 Australian mortgage holders in October reveals that 69% of mortgage holders felt they were likely to buckle from a further rate hike.
To put today’s rate hike in context, another 0.25 percentage point increase in the cash rate rise will see monthly repayments – on an average loan amount of $611,154 – rise from $2,570 in April 2022 to $4,137, a total increase of $1,567 or 61% since the current rate rise cycle began.
While Aussies have managed to cope with rate hikes so far, Canstar’s money expert Effie Zahos suspects an additional $99 per month, courtesy of today’s rate rise (on the average loan amount) could be the tipping point.
“The pressure of a 13th rate hike might simply be too much for some households,” said Zahos.
Before the May 2022 cash rate rise, there were 5,199 owner occupied and investment rates listed on Canstar.com.au below 5.50%, now there are just 8 rates.
The lowest variable rate on Canstar.com.au as at 1 May 2022 (prior to the first cash rate rise) was 1.58%, compared to 7 November 2023 when the lowest variable rate is now 5.45% – a huge difference of 3.87 percentage points.
Loan commitments subdued
New ABS lending data reveals that the small uptick in new loan commitments in September is mirrored by similar levels of borrowers switching lenders in search of better deals.
The number of mortgage holders making the move to a new lender fell by 7.8%, with $18.5bn in loans switching to a new lender in September when compared to the month prior. However, this is still 1.5% higher compared to a year ago.
September data reveals:
- A total of $25.01bn in new home and investment property loans, up by a modest 0.6% from August.
- New loan commitments for owner occupier borrowers fell 0.1% over the month to $16.06bn.
- Investment lending increased by 2.0% to reach $8.95bn.
Despite the subdued start to the selling season, Canstar’s group executive, financial services, Steve Mickenbecker expects more property listings seeping into the market to boost loan commitments in coming months.
“September’s new lending commitments rose by just 0.6 percent for the month, but with more stock coming onto the market in a strengthening but not yet booming spring property season, a stronger recovery could be ahead of us,” said Mickenbecker.
“It’s also likely to slow the pace of house price rises, which have been fed by undersupply.”