Higher costs for essentials and higher interest rates will be a ‘double whammy’ for households
As universally expected, the RBA made the decision to raise the cash rate at their June meeting, however, the 50 basis point hike was larger than expected.
The latest move takes the overnight cash rate to 0.85%.
Interest rates consistently rise
With underlying inflation moving sharply higher to be up 3.5% over the year, the RBA’s heavy lifting on the cash rate still has some way to go, with interest rates likely to consistently rise through the second half of the year and into 2023.
With the cash rate up, it’s highly likely variable mortgage rates will rise by the same or a similar amount over the coming week, taking the average variable interest rate for a new owner-occupier loan to around 3.16%.
Together with the 25 basis point increase handed down last month, the cumulative 75 basis point lift in mortgage rates will add approximately $200 per month in additional repayments on a $500,000 mortgage compared with mortgage rates in April.
While higher interest rates will lower borrowing capacity, fewer household savings and tighter balance sheets will also weigh on serviceability assessments for prospective borrowers, adding to diminished demand for home purchases.
Settled sales estimates from CoreLogic indicate dwelling sales over the three months to the end of May were -19% lower than at the same time a year ago.
A similar trend can be seen in home lending data from the ABS, where the number of new mortgage commitments is also trending lower.
What does this mean for households?
In a double whammy for indebted households, the additional cost of debt comes as non-discretionary inflation rises at more than twice the pace of prices for discretionary goods.
Higher costs for food, fuel and finance are likely to see household savings continue to taper as families funnel more of their income towards servicing their mortgage and funding essential costs of living.
For housing markets, higher mortgage rates add further downside risk to values, which are already trending lower, such as the case in Sydney and Melbourne, or losing steam in the rate of growth across most other markets.
Importantly, home values were already easing well ahead of a rising cash rate.
A combination of higher fixed mortgage rates, lower consumer sentiment, tighter credit conditions and worsening affordability have all played a role in the slowdown to date.
While we expect the housing downturn evident in Sydney and Melbourne will gradually spread to other regions, the trajectory for this will depend on how fast and how high-interest rates move and normalise, along with the performance of the broader Australian economy and labour market.
A stronger economy, along with the tightest labour market conditions in a generation, should help to ensure the ensuing housing downturn remains orderly.