End of the Cash Rate Hiking Cycle: Implications for the Property Market

Australian mortgage holders have been at the mercy of 12 consecutive cash rate hikes since May last year, taking the cash rate from an emergency low of 0.1 percent to 4.1 percent in just over 12 months.

But the general consensus is that relief is on the horizon, with most experts predicting a maximum of one to two more rate rises, before the rate is slowly brought back down.

In its most recent two meetings, the RBA board for monetary policy elected to hold the cash rate steady, as inflation eased and the economy slowed.

And so we could very possibly be nearing the end of the most aggressive rate hiking cycle in a generation – but what could that mean for the property market?

Buyer confidence

Buyer confidence took a temporary hit last year, with rate hikes bringing about a level of uncertainty in the market.

But with the recent pause in cash rate hikes, buyer confidence already looks to have returned particularly evident in the investment purchasing segments.

Clearance rates have been holding relatively strong in recent weeks, with the combined capital’s preliminary clearance rate rising for the first time in three weeks, up 80 basis points to 71 percent, according to CoreLogic.

CoreLogic’s Tim Lawless noted that the end of the rate hiking cycle would see greater consumer confidence flow through to the property market.

“For the housing sector, the decision to hold interest rates over the past two months is positive news. A growing expectation that interest rates have peaked, or are near a peak, should help to lift consumer sentiment from the recession-like lows that have persisted over the past nine months,” said Mr Lawless.

“Consumer confidence and housing activity go hand in hand.  Generally, when sentiment is low, home sales are low and vice versa; so, any lift in sentiment is likely to be accompanied by a rise in active buyers and sellers.”

But while Mr Lawless anticipates a boost in active sellers, some other experts have predicted the opposite. An increase in stability for homeowners could in fact see lower levels of active sellers entering the market.

Stability for homeowners

Homeowners have been subjected to substantial increases in their mortgage repayments, with the average variable home loan of $500,000 seeing an increase of $1,134 in monthly repayments.

It’s meant a slight increase in reselling, albeit nowhere near as high as experts had predicted.

Managing director at SQM Research, Louis Chrisopther, told the ABC he had observed a slight increase in resellers selling their homes within two years of buying them, but the change was modest and the market was absent of signs of panic selling.

Pat Bustamante, senior economist at St George, told AFR’s Nila Sweeney that he expects stable rates to result in fewer new listings, and larger numbers of buyers.

“Affordability has been reduced by the 12 rate rises, but we’re still getting higher wages and a strong job market, which could boost buyer’s borrowing capacity,” said Mr Bustamante.

“So now that buyers have some certainty about the interest rate, they could return in bigger numbers this spring.

“At the same time, the stable interest rate may also give homeowners confidence that they could manage their mortgage repayments and decide to hold on to their property, which would result in lower stock in spring than people are expecting.”

Greater borrowing power

One side effect of higher interest rates has been diminished borrowing capacity, with prospective homeowners finding that banks are offering far less than they might have qualified for a year ago.

According to comparison site Canstar, and published in the Sydney Morning Herald, the borrowing capacity of a childless couple with two incomes has been slashed by almost 30 percent.

It means instead of qualifying for a loan that would allow them to spend $1.42 million on a house at auction (20 percent deposit included), their buying power has been reduced to $1,038,000, leaving little in the way of options if Sydney is their preference.

Ultimately, with house prices being buoyed by high demand and low supply, prices could surge upwards when the borrowing power of potential buyers improves if the cash rate comes back down.

And it’s widely expected to do so, with NAB expecting a return to 3.1 percent by November next year.

More demand for new homes as the general market fails to supply enough

If the cash rate decreases, borrowing capacity improves, and mortgage serviceability eases, the demand for housing could increase exponentially.

Paired with increased demand from migration, Australia’s existing housing market could struggle to supply enough homes.

With frustrating levels of competition, this could lead home buyers to opt for new homes rather than established ones.

But while this scenario is entirely possible, building processes are long, meaning that new home stock will inevitably run into a shortage projected by current figures.

The Housing Industry Association warns that the shortage of new homes will have dire implications for affordability, and increasing supply is the only way to combat this.

New home sales are down a whopping 41.8 percent since August last year and loans for new homes are 31.1 percent lower over the past year.

“Australia has a structural undersupply of housing, with rental vacancy rates around the country at record lows, driving rents and dwelling prices to new heights,” said chief economist at HIA, Tim Reardon.

“The return of overseas workers and students, without an equivalent boost to housing supply, will exacerbate the situation.

“The only solution to addressing this crisis is to increase the supply of new housing.”

And perhaps the lowering of the cash rate could do just that.

Influx of investment

Experienced investors are always watching the market, keeping an eye out for the perfect opportunity.

Now they’re catching onto the growing market, and buying up. 

New data from the ABS lending statistics revealed that 34 percent of new loans issued in June were investment loans, indicating that investment is back to its long-term average, according to CoreLogic.

In NSW the figure was even greater, with 38 percent of new loan commitments being investors.

Investors are likely identifying the housing shortage as an opportunity with a rapidly closing window as house prices experience month-on-month growth.

As the cash rate lowers, and borrowing capacity improves, investors could be prompted to expand their portfolios, taking the banks up on increased loan offers, and enticed by lower interest rates.

As always, it’s impossible to pinpoint the exact route the property market will take. But these are all entirely viable scenarios that we could be looking at in 2024, if inflation comes back to the RBA’s target range and the cash rate is lowered, as is widely expected.

This article is general in nature. Readers should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.