The Reserve Bank has increased interest rates after raising the cash rate target by 25 basis points, adding further pressure to Australia’s already slowing housing market.  

The RBA increased the cash rate target from 0.1% to 0.35% in a bid to curb high inflation, marking the first interest rate rise in 11 years.  

“The 5.1% inflation rate shocked the markets and made an increase in the Reserve Bank cash rate near inevitable this month,” Canstar’s finance expert Steve Mickenbecker said. 

“The Reserve Bank will be hoping the cash rate rise will take the heat out of the economy and slow inflation, so that steady and orderly growth will carry through to wages and protect borrowers from higher repayments.  

“This ‘Goldilocks’ outcome is on a tightrope, particularly with supply side influences on inflation at the moment.  

“Rate increases will crystallise the expectation of significantly higher borrowing rates in the next couple of years and should hit property prices and slow the housing market.  

“This will at least relieve the desperation of first home buyers trying to get into the market.” 

CoreLogic Research Director Tim Lawless said higher interest rates were set to add to the downwards pressure on housing growth rates. 

He said housing growth rates were already losing steam or, as in the case of Sydney and Melbourne, were trending into negative territory due to affordability constraints, higher fixed term mortgage rates, lower levels of consumer sentiment and other factors.  

According to CoreLogic’s latest national Home Value Index, Sydney housing values recorded its third consecutive month-on-month decline, down 0.2% in April.  

Melbourne values reached -0.04% in April and have been down during three of the past five months. 

Lawless said he expected housing markets to lose further momentum as the cash rate normalised. 

He said past RBA research showed ‘high end’ housing markets with higher investor concentrations were more sensitive to changes in interest rates in the short term. 

Lawless said this may have been why Sydney and Melbourne markets were already seeing price declines, with more affordable housing markets expected to eventually follow the downward trend. 

CoreLogic modelling estimated that a 100 basis point lift in variable mortgage rates could mean a new borrower in Sydney could face a rise in monthly mortgage costs of $486, while a 200 basis point rise could mean monthly mortgage costs could be $1,005 higher than current levels. 

Canstar’s Mickenbecker said increases to repayments may not sound like a big stretch, but with wage growth having fallen behind the cost of living, rate increases will add to the financial pressure on many households. 

“The many borrowers who are ahead on their loan repayments and seen their equity grow over the last two years in particular, will not be too stressed,” Mickenbecker said.  

“But it’s a different story for borrowers who have stretched to get into a house in the last 12 months or so, and haven’t had time to make extra repayments or build equity.”