Rate outlook ‘could trigger another property downturn’

FOLLOWING another interest rate hike and higher odds for more tightening, the residential property market’s recovery may be cut short.

The Reserve Bank hiked by another 25 basis points last week, taking the cash rate to 4.1 per cent, and kept its options wide open to keep going if deemed necessary.

While interest rates have still been heading up, the housing market has started recovering in a way few anticipated.

After stabilising in February, the residential property market staged a turnaround as measured by property data firm CoreLogic, with the pace of growth accelerating in May.

But the June cash rate decision and renewed determination from the RBA to do whatever is necessary to tackle inflation has SQM Research founder Louis Christopher leaning towards a “false dawn” scenario for the property market.

Mr Christopher said the most likely outcome for the property market was now a “double dip downturn”, where prices recover in the first half of 2023 and then fall again in the back half of the year, leaving values fairly flat over the calendar year.

He put this down to two main factors: a further shrinking of buyer borrowing power as rates rise, and a pick-up in forced selling.

The property analyst was particularly worried about what some have called the “mortgage cliff”, the sizeable cohort expected to roll off their low-rate fixed loans to much higher variable rates in the coming months.

He said this would “play out badly” because many new borrowers, especially those who bought in 2021, were stress tested with a buffer of between 2.5-3 per cent, meaning they had to prove they could pay back their loans if their rate rose to about six per cent.

With variable rates getting up as high as six or seven per cent, Mr Christopher said there would be more forced selling, especially when paired with an uptick in unemployment as the economy slowed.

AMP Capital deputy-chief economist Diana Mousina agreed the revived hawkishness of the RBA could fuel another period of falling property prices.

Ms Mousina said there could be another two, or even three, rate rises to come, which would limit further how much people could borrow.

She said borrowing capacity was already down 29 per cent compared to the pre-tightening era and would shrink to 32 per cent with three more 25 basis point hikes.

But the group’s economists have not changed their forecasts for property price movements in 2023.

“Prices could have been up six to seven per cent just based on what they’ve been doing the last few months, so the latest rate rises, just kind of reaffirm our view that prices will probably be about flattish this year,” Ms Mousina said.

On the other hand, she said the main drivers pushing up prices like few new listings, high rents, and strong population growth, had not gone away.

She also said there was a perception in Australia that home prices “don’t really fall”, which could mean the upswing may trigger “a bit of a FOMO” mentality and add to price pressures.

“We haven’t seen a rate rise cycle this aggressive since the 90s, so prices could still go down from here,” Ms Mousina said.

Domain chief of research and economics Nicola Powell said the latest interest rate hike and the heightened probability of more could take some momentum out of the market’s recovery.

But Dr Powell said there were some strong underlying drivers pushing up demand and weighing on supply.

In addition, she said there was a large segment of the market insulated from interest rate movements, with new data from PEXA showing roughly a quarter of all properties in the eastern states were bought with cash last year.

The latest rate rise and accompanying rhetoric may also spook sellers, she said, and prompt them to delay their sales, further weighing on supply.

– POPPY JOHNSTON/ AAP