Rising interest rates are expected to have a swifter-than-usual impact on the property market as reduced borrowing power and higher mortgage repayments weigh on already slowing buyer demand.
Historically, changes to the cash rate had taken multiple months to have an effect, AMP Capital chief economist Dr Shane Oliver said, but the lag has narrowed as very high prices and debt-to-income ratios made the market more sensitive to interest rate changes.
“Traditionally, it takes a while for higher interest rates to hit because they’re usually offsetting good news with higher employment and rising wages,” Oliver said, adding there had been an eight-month lag between the first rate hike back in 2009 and weaker prices.
“The complication this time around is that fixed [mortgage] rates played a much bigger than normal role in driving the boom in first place.”
Record-low fixed mortgage rates had been a key driver of the boom, Oliver said, making up a far greater share of lending than usually seen. But they had bottomed out last year and climbed rapidly since, reducing borrowing power ahead of any official cash rate hike.
“The key impetus behind the boom in property has now reversed,” he said.
“New buyers are ending up with far less capacity to pay than a year ago, and that’s even though we’ve only seen one move by the RBA. I think the impact will show up a lot faster [as a result].”
Oliver expected the cash rate to hit 2 per cent before the end of the year, and peak around 2.5 per cent by mid next year. Combined with worsening affordability, this would push prices down 10 to 15 per cent nationally from mid-year to early 2024, with declines in Sydney and Melbourne to be at the higher end of that range.
Gareth Aird, head of Australian economics at Commonwealth Bank, said the historic lag between a cash rate change and its effect on the market had been shortening, and expected to see evidence of its impact swiftly, especially given the expectations for multiple rate hikes.
Auction clearance rates had already softened, Aird noted, and prices had peaked in Sydney and Melbourne as higher fixed interest rates, buyer fatigue, affordability constraints and growing expectations of cash rate hikes had weighed on sentiment.