The central bank held rates steady this month, but last month’s move may already be having an effect, research head says
The Reserve Bank of Australia has decided to keep the cash rate steady at 4.35% for its final meeting of the year. This decision was largely anticipated, considering the weaker data flows observed in November. Retail trade experienced a decline of 0.2% month-on-month, and the unemployment rate rose by 20 basis points to 3.7% in October.
Although the monthly Consumer Price Index (CPI) measure also declined, it may have had less influence on the RBA's decision, according to Eliza Owen (pictured above), head of residential research for CoreLogic.
Writing for the analytics company’s website, Owen said this is because the October CPI was affected by various subsidies, including the increase in the Commonwealth Rental Assistance, and excluded some services with more persistent inflation. As a result, it provided a less clear indication of inflationary pressures.
The weaker data flows were offset by a surprisingly strong month of housing lending in October, rising 5.4% from the previous month. However, Owen said that the spike may be short-lived, with CoreLogic projecting a month-over-month drop in sales volumes for November.
“Recent market performance indicates that while housing has been surprisingly resilient this year in terms of capital gains, interest rate increases have had some impact,” Owen wrote. “This is particularly the case where rate increases were unexpected. This was evident following the ‘surprise’ rate hike through June, and appears to have had some impact through November. CoreLogic’s national Home Value Index recorded its lowest monthly increase since February, with values up just 0.6% in November.”
The slowdown in housing market performance has been particularly noticeable in Melbourne, where values actually fell by 0.1% in November. Sydney also experienced a significant slowdown in growth, with values increasing by only 0.3% compared to 0.7% in October.
However, it's important to note that interest rates are not the sole factor affecting the housing market, Owen said. Stretched affordability and more normalised stock levels have also played a role in dampening its performance.
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In addition, the Australian Prudential Regulation Authority released the September quarter property exposures data, which showed that households' ability to manage higher mortgage costs remains resilient. Although the non-performing loan rate increased slightly to 0.8% of outstanding housing credit, the portion of housing loans that were 30-89 days past due also rose to just 0.54% of loans, according to CoreLogic.
Owen said the resilience in mortgage serviceability may appear surprising, given the sharp rise in mortgage rates since April 2022. Assuming the November rate rise is fully passed on, the average variable rate may now be around 6.25%. This increase has added an estimated $1,690 per month to variable rate mortgage repayments for borrowers with a $750,000 loan in April 2022.
“However, economic data suggests households are continuing to cope through reduced savings, potentially working more hours, and putting less towards mortgage savings buffers and more towards scheduled repayments,” Owen wrote.
The next RBA Board meeting is scheduled for February 2024, as the bank transitions to its new meeting schedule of eight meetings per year. The RBA has emphasised that any further tightening of monetary policy will depend heavily on data indicators.
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