Don't look for rate hikes to improve affordability – experts

While earlier-than-expected rate rises may slow the booming market somewhat, experts warn that affordability will continue to be an issue in Sydney and Melbourne.

The Reserve Bank is facing calls to hike interest rates this year following higher-than-expected inflation and strong improvement in employment numbers, The Sydney Morning Herald reported. The RBA had previously forecast the cash rate to remain at a record low until 2024.

While most experts thought the rate would rise sooner than 2024, many previously expected it to stay on hold until next year, with home prices in cities like Sydney and Melbourne then dropping following the rate rises. However, experts say it would take multiple sharp cash-rate hikes to see steep drops in property values this year, the Herald reported.

Independent economist Saul Eslake told the publication that a rate hike’s effect on property values would be “not very much at all,” although price gains could see a generalized slowing over the course of the year.

“Typically, prices don’t go down when rates go up; what falls is turnover,” Eslake said. “People, if they think their house will sell for less than what they want to sell for, they don’t sell and hold off … it’s turnover in stamp-duty revenue, real estate agents’ commissions and things like that which drop.”

Property growth in Sydney and Melbourne slowed to its lowest levels in December following double-digit annual spikes during the pandemic, according to data from CoreLogic. Over the first 26 days of January, Sydney prices have risen about 0.7%, while Melbourne values are up about 0.2%, the Herald reported.

Rich Harvey, chief executive of buyers’ agent Propertybuyer, said rates could rise as soon as November or December of this year.

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“It depends on inflation and wages … the RBA has repeatedly said they won’t stifle the economy,” Harvey told the Herald. He added that the resumption of immigration could offset any future rate hike.

“The impact on property prices depends on how significant the rate rises are and how many,” Harvey said. “But even talk of rate rises tends to soften the market – the jawboning effect – and if we get a dramatic rise, that will have a slowdown effect.”

Simon Pressley, founder of Propertyology, told the publication that even discussions of rate rises over the last 18 months haven’t kept house prices from soaring.

“The RBA has repeatedly said they are unlikely to raise interest rates until wages increase significantly,” Pressley said.

Pressley said that if rates rose by 0.5% by the end of 2023, a borrower with a $600,000 mortgage would pay $3,000 more per year in interest – but their wages could also be significantly higher. He said it would take “more than a couple of increases over a couple of years” to see a substantial effect in most markets.

“Both for sale and for rent, Australia has a dire shortage of [homes], and the financial capacity of Australian households literally has never been stronger,” Pressley said.