It’s all about the number ‘1’ this month for the RBA, after it left rates on hold yet again at its November meeting.
It’s now 1 year since the official cash rate was last changed…and 11 years since the rate was last increased. Meanwhile, there are now more than 200 home loan product rates that begin with a 1, but more about that later.
What the RBA said
RBA governor Philip Lowe said Australia’s economic recovery from Covid was underway and that the central forecast for GDP was growth of 3% over 2021, followed by 5.5% and 2.5% over 2022 and 2023 and an improvement in employment levels provided there were no further setbacks on the health front.
“The Delta outbreak caused hours worked in Australia to fall sharply, but a bounce-back is now underway,” Lowe said in a statement. “The Bank’s business liaison and the data on job ads suggest that many firms are now hiring, which will boost employment over coming months. The central forecast is for the unemployment rate to trend lower over the next couple of years, reaching 4.25% at the end of 2022 and 4% at the end of 2023.”
A number of analysts are now starting to mention that inflation, currently at 2.1%, has hit the RBA’s target range for a rate rise earlier than expected, but Lowe remains cautious.
“Inflation has picked up, but in underlying terms is still low, at 2.1 per cent,” he said. “The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently. This is likely to take some time.”
Lowe noted that housing prices continue to rise in most markets and said he “welcomes APRA’s recent decision to increase the interest rate serviceability buffer on home loans.”
This time last year
When the RBA made the choice in November last year to slash the cash rate from 0.25 to 0.1%, there were just 19 home loan products with an interest rate below 2%. Of these, 6 were variable, 9 were 1-year fixed, 1 was 2-year fixed and 3 were 3-year fixed, according to research from RateCity.
Now, there are 202 home loans with interest rates starting with a 1. Of these, 62 are variable, 54 are 1-year fixed, 70 are 2-year fixed and 16 are 3-year fixed.
Today, just like 1 year ago, there are zero 4-year or 5-year fixed rate products with rates below 2%.
The property market has seen very strong value growth in the year since the last rate movement and RateCity research director Sally Tindall believes the spike is a direct result.
“The surge in home loan rates under 2 per cent since last November helped set the property market alight and in doing so, has widened the gap between those already in the market, and those priced out,” Tindall said. “In the last 12 months, the average house price has jumped $350,505 in Sydney and $162,138 nationally.
Where does it all end?
Tindall believes the potential for a rise in rates, plus the effect of recent APRA changes to serviceability buffers will see the property market eventually run out of steam.
“The eye-popping property price rises over the last 12 months aren’t likely to continue into 2022 at the same pace, with fixed rates already on the rise and renewed speculation a cash rate hike will come earlier than 2024,” she said. “APRA is also at the ready to reign in the number of households head over heels in debt, with its new 3% serviceability buffer due to kick in … along with a threat to take further action if needed.”
Meanwhile, AMP’s Shane Oliver says the second half of 2022 is when he believes the market will hit is ceiling, followed by potential value falls in 2023.
“By the end of next year, I think the upswing will come to an end, and we’ll start to see price falls as higher interest rates feed through,” he told the Australian Financial Review this week. “I think later next year, we’ll start to see higher variable rates, and the combination of higher interest rates, poor affordability and increased listings, I think will start to weigh on the property market.”
