The Reserve Bank of Australia has raised the cash rate by 0.25 percentage points to 4.60%, delivering a fourth increase this year even as property prices fall across most of the country.
The decision puts the cash rate at its highest level since 2011.
For mortgage holders, the next question is how much of the rise lenders will pass on. Canstar estimates that a full 0.25 percentage point increase would add about $91 a month to repayments on a $600,000 loan with 25 years remaining.
Across this year’s four rate rises, that borrower would be paying about $364 more a month than before the increases began.
Property prices are falling, but the picture varies by city
Australia’s housing downturn has spread well beyond Sydney and Melbourne. Cotality’s national Home Value Index fell 0.9% in August, the fifth consecutive monthly decline, leaving values 3.6% below their March peak. Over winter, prices fell in 93% of capital city suburbs.
Sydney recorded the steepest fall in August, down 1.4% for the month and 7.1% from its peak. Melbourne and Canberra values each fell 1.1% in August, Brisbane dropped 1.0%, and Adelaide and Perth were both down 0.8%. Regional markets have softened too, although their combined decline was smaller at 0.4% for the month.
The expensive end of the market has taken the largest hit. Cotality says upper-quartile house values are 10.7% below their peak in Sydney and 10.5% below peak in Melbourne. Units and lower-priced homes have generally held up better, although those parts of the market are also beginning to weaken as the downturn spreads.
Buyers have more choice, but many are taking longer to commit. Cotality found the median time to sell had increased from 28 days a year ago to 39 days. The median vendor discount across the capitals reached 4.2%, while the four-week average auction clearance rate was 49.5% at the end of August. Cotality’s estimate of home sales over the latest quarter was 15.5% lower than a year earlier.
Those figures may give you more room to negotiate if you’re buying, particularly where similar homes are sitting on the market. But lower prices don’t automatically make a purchase easier. Higher rates can reduce how much you’re approved to borrow and increase the monthly cost of the loan you do take out. If you’re working from an older pre-approval, check the numbers again before making an offer.
Why raise rates when house prices are falling?
The RBA sets interest rates to bring inflation back to its 2 to 3% target, rather than to support a particular level of property prices. The latest available ABS figures show consumer prices rose 3.5% in the year to July. Trimmed mean inflation, which filters out unusually large price movements, remained at 3.6%.
Several pressures sit behind those figures. Housing costs rose 5.0% over the year to July, including a 5.7% increase in the cost of new dwellings as builders passed on higher materials and labour costs. Food prices rose 3.2%. Petrol prices jumped 7.5% in July alone, partly because of higher world oil prices and the partial unwinding of fuel excise relief.
The RBA has also warned that global energy and other input costs could spread into a wider range of prices if businesses pass them on. At home, it sees demand for goods and services still pressing against the economy’s ability to supply them, with weak productivity making that balance harder to restore. Higher interest rates cannot lower the world oil price or build more homes. The RBA’s aim is to slow spending enough to prevent those cost increases from becoming persistent inflation.
That explains the tension in today’s decision. Falling property values show higher rates are already affecting buyers, borrowing and household confidence. The RBA has acknowledged that a deeper housing downturn could weigh on the economy, while also noting that prices remain around 50% higher than in early 2020.
All four major banks had forecast today’s 0.25 percentage point rise. What happens after this is less settled: ANZ forecasts another increase in November, while the other major banks have identified a further rise as a risk.
For now, borrowers will be watching their lenders’ rate announcements, and the August inflation figures due tomorrow, for a clearer picture of what comes next.
Disclaimer: This article is general information only. Your repayments may differ, so check with your lender before making financial decisions.
