Australia’s largest bank has revealed a major factor that could stop the RBA in its tracks and put an end to sharp interest rate hikes.
Property prices are already plunging across the country – and Australia’s biggest bank says this could cause major problems for the RBA ‘behind closed doors’.
Last month, the Commonwealth Bank announced that property prices in Australia’s two largest cities are expected to fall 18% by the end of 2023 as households reel from soaring interest rate.
The bank also predicts an 11% drop in Sydney house prices this year alone, with Melbourne house prices also expected to fall by 10%.
As recently as March, the banking giant was expecting a much more modest drop of 3% in the two major cities this year and 9% in 2023, but the Reserve Bank’s aggressive rate hikes have triggered a major – and unwelcome – overhaul.
In May this year, the RBA announced the first official interest rate hike since 2010, raising the cash rate by 25 basis points to 0.35%.
Barely a month later, the RBA hit homeowners again with an “oversized” 50bps rate hike, followed by another 50bps double whammy this week, the cash rate fell. now standing at 1.35% – although it is almost certain that it will continue to rise sharply in the coming months in a bid to rein in inflation.
Gareth Aird, head of the Australian economy at the CBA, said the latest 50 basis point hike suggested the RBA had decided to preempt the tightening cycle.
As a result, the ABC now expects a 0.25% rate hike in August, September and November, with the spot rate expected to hit 2.10% by Christmas.
“There has been a clear shift in tone and stance from the RBA Board…House prices will come down from here as the RBA is expected to rapidly tighten policy via price hikes. rate,” Mr. Aird recently wrote.
“The extent to which prices contract will largely depend on how quickly and how much the RBA raises the cash rate.”
One thing that could stop RBA
This month, the ABC revealed that the decline in house prices had already accelerated in June – and claimed it may be the only thing stopping the board.
“Indeed, behind closed doors, we believe concerns will mount at the RBA if house prices fall too quickly,” Mr Aird wrote in his July update.
“We think the speed and size at which house prices correct down will ultimately act as a limit on how high the RBA will be willing to take the cash rate.”
According to the report, house prices fell by 0.8% in the eight capitals in June alone – with a fall of 1.6% in Sydney and 1.1% in Melbourne – with annual growth falling to 8.7%.
Mr Aird said he expected house prices to fall 15% nationwide by the end of next year.
“The expected declines in house prices are significant… there are a lot of owners who have bought recently. These buyers will feel the simultaneous negative impact of rising interest rates and falling home prices,” he wrote.
“Deeply negative real wage growth is further exacerbating the sense of depression in many households, as evidenced by recent consumer confidence surveys.
“The RBA does not target house prices. But the housing market and the broader economy cannot be separated.
He warned that if the RBA takes rates “too high and too fast”, we can expect to see even bigger drops in house prices.
Apartment prices must increase “by at least 20%”
Meanwhile, billionaire developer Harry Triguboff has claimed that prices for new apartments are set to rise by at least 20% due to a series of disasters plaguing the construction industry, including soaring costs, labor shortages and natural disasters.
He said The Australian that without price increases, developers could sink.
“Our costs have gone up, and it’s a bottleneck, everyone wants the goods, and there are delays everywhere,” Mr. Triguboff told the publication.
“Builders can’t make a profit already. If prices drop a lot, the government will step in and cut the crazy costs it imposes on builders. The government cannot allow housing to decline.