Recent Consumer Price Index (CPI) data indicating a 4.4% inflation rate for May has raised alarms about the possibility of another Reserve Bank of Australia (RBA) cash rate increase. This could have significant implications for the Australian housing market, which has shown resilience despite rising interest rates.
Housing Market Defying Higher Interest Rates
Surprisingly, the Australian housing market has not buckled under the pressure of higher interest rates. In fact, national home values have rebounded from their low point in January 2023, reaching 4.6% higher than their level in May 2022. This resilience can be attributed to several factors, including:
- Low supply relative to demand: Tight labor markets and pandemic-induced savings have supported mortgage serviceability, while a constrained construction sector and robust population growth have fueled demand for housing.
- Favorable buyer profile: Buyers with larger deposits may be less sensitive to interest rate fluctuations, allowing them to continue purchasing properties.
- Variable rate mortgages: The prevalence of variable rate mortgages in Australia may lead buyers to anticipate future rate reductions, influencing their decision to purchase now.
Cracks Emerging in Housing Demand
Despite the overall resilience, signs of weakening demand are starting to emerge. National home values grew by 1.8% in the June quarter, a slower pace than the 3.3% increase observed a year ago.
Additionally, buyer demand appears to be shifting towards more affordable markets, with Perth and Adelaide playing an increasingly significant role in driving growth.
Impact of Potential August Rate Rise
A further 25 basis point rise in the cash rate in August would push monthly mortgage repayments on the median dwelling value above $4,000. This would make homeownership even less attainable for prospective buyers and exacerbate the cost difference between owning and renting.
Uncertainty Surrounding August Rate Decision
While the RBA has expressed a low tolerance for further inflation, an August rate hike is not yet guaranteed. The decision will depend on various factors, including quarterly inflation figures, labor market reports, and retail sales data.
Anticipated Slowdown in Housing Purchases
Even if interest rates remain unchanged, housing purchases are expected to slow down as economic conditions weaken and affordability constraints become more pronounced. Declining labor force conditions and dwindling household savings will likely dampen demand and potentially affect mortgage serviceability.
Looking Ahead
The future of the Australian housing market remains uncertain. While its resilience in the face of rising interest rates is noteworthy, emerging signs of weakening demand and the possibility of another RBA rate hike could significantly alter its trajectory.
