The negative impact of rising interest rates on Australian home prices, household spending and housing investment could undermine consumer confidence and increase the likelihood of a recession in Australia, according to analysts and economists.
As the RBA seeks to curb inflation, banks have joined central banks around the world to raise their cash rates by 50 basis points to 1.35% after the last two 25 basis and 50 basis point hikes this year. did.
AMP Australia’s senior economist, Diana Musina, told CNBC’s “road signs” on Tuesday that house prices in the capital will fall by 15% to 20% in 2023, with a “big drop”. It will be a hit. ” Household.
“Australia has seen some minor fixes for decades, but it’s [15%-20%] It’s going to be a pretty decent fall. ”
“In the last two and a half years of the pandemic, housing prices have clearly risen significantly as the housing market has been very strong and there has been a lot of demand in the Australian region.”
“It will hurt households a bit because of the asset effects that come when home prices fall.”
Su-Lin Ong, Chief Economist at RBC Capital Markets, said:Street sign asia“She expected a 19% drop from peak home prices to the trough, which could have a” reasonably significant “damage to consumer confidence.
However, she also said that these expected price declines are less than the nearly 40% rise in home prices over the three years from 2019.
40% growth over the three years from 2019 onwards is largely compared to other boom periods, including the last five years from 2012 to 2017, when home prices rose by 50%, such as in Sydney and Melbourne. It is getting bigger in major cities. According to property data providers such as Corelogic.
This year’s rate hike is the first in 11 years and is expected to increase further in the future. Economists predict that the cash rate could rise somewhere between 2.5% and 2.85%.
Home prices fell for the first time in February of this year after enthusiastically rising over the pandemic, with home prices rising sharper than apartments.
House prices have risen sharply over the last three years amid the ultra-low interest rates maintained by the RBA. In an effort to mitigate the pandemic recession. Low interest rates have boosted home purchases, primarily among Australian residents and first-time homebuyers, rather than investors or overseas buyers.
But when prices started to rise, everything is changing now.
National auction clearance rates and auction numbers (a barometer of Australian housing market buoyancy) are beginning to decline.
According to Corelogic, auctions over the past week have been low compared to the same period last year. According to the data, only 55% of the listed ones were successful, compared to 72% during the same period last year.
The Reserve Bank of Australia raised its cash rate by 50 basis points to 1.35% in July 2022, recording a 125 basis point increase since May 2022, the fastest series of moves since 1994.
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“Given that inflation will remain stubbornly high for some time and interest rates are expected to rise significantly accordingly, the rate of decline in home prices will continue to gain momentum and spread more broadly,” Corelogic said. In a memo last week, he said during the company’s monthly price updates.
Marcel Tieriant, senior Australian and New Zealand economist at Capital Economics, said rising interest rates could hurt housing investment and “close to a recession” next year.
However, Theliant was more optimistic about personal consumption, pointing out that household savings rates were healthy.
Given that Australia’s household debt reached record highs this year, outlaws were less confident, adding that 77% of their debt was related to housing.
“Households are likely to be more sensitive to rising interest rates as the sector’s debt is at record levels,” he said.
However, the National Australia Bank — expects a 18% drop in home prices from peak to trough. — Australia does not anticipate a “chaotic” recession because there is no oversupply of housing.
Conversely, according to Moody’s Investors Service, rising interest rates worsen the affordability of homes, even though real estate prices are falling.
Latest data from the Australian Bureau of Statistics The median home prices in the two largest cities, Sydney and Melbourne, have risen. In the first quarter of this year, Sydney’s price rose 16% year-on-year to A $ 1.25 million ($ 850,000), while Melbourne’s price rose 9% to nearly A $ 1 million ($ 680,000). became.