What’s The Melbourne Housing Market Doing Among Rising Interest Rates?

12 Jul 2022

The Reserve Bank of Australia has announced further hikes to the official cash rate, with lenders already passing them on.

The RBA announced an increase of 50 basis points on Tuesday, bringing the official cash rate up to 1.35. It is the third increase since the rate was raised in May, after two years of financial relief was initiated to soften the COVID19 blow.

Industry experts have warned of such hikes, and their effects on the housing market, but it still remains unclear what the direct outcome will be. All we can do in anticipation is to look at the data.

Preliminary data from CoreLogic this week reported that auction clearance rates had taken a drastic hit, and so too did the number of homes offered at auction. We saw the lowest combined capital city preliminary clearance rates in more than two years, with 1881 homes going under the hammer and a 53.2% success rate.

This is in comparison to the 2364 homes that were offered up at auctions the week prior, and 2168 during the same time last year.

Core Logic’s National Home Value Index recorded two consecutive months of declining home values over May and June. Melbourne unit values fell 0.5% and home values fell 2.4% in the June quarter, with an overall value decline in dwellings of 1.8%.

Research director at CoreLogic, Tim Lawless, acknowledged that the downward trend in housing values gradually began last year, with multiple responsible factors, but faster falls have coincided with the May rate hikes.

“Housing value growth has been easing since moving through a peak in March last year when early drivers of the slowdown included rising fixed-term mortgage rates, an expiry of fiscal support, a trend towards lower consumer sentiment, affordability challenges and tighter credit conditions,” said Mr Lawless.

“More recently, surging inflation and a rapidly rising cash rate have added further momentum to the downwards trend.

“Since the initial cash rate hike on May 5, most housing markets around the country have seen a sharper reduction in the rate of growth.

“Considering inflation is likely to remain stubbornly high for some time, and interest rates are expected to rise substantially in response, it’s likely the rate of decline in housing values will continue to gather steam and become more widespread,” said Mr Lawless.

The dropping house prices indicate a market swing to favour buyers, however, consumer sentiment will likely be impacted by interest rate uncertainty.

Finder surveyed a panel of economists and experts in the leadup to the latest RBA cash rate hike, and 94% correctly predicted this week’s rate rise. Two-thirds of those experts believe the cash rate will peak at 2.5% or even higher.

“There’s no light at the end of the tunnel just yet with our panel forecasting at least two more rate rises to come. This will put further pressure on a rapidly deflating housing market,” said Graham Cooke, head of consumer research at Finder.

It’s not all doom and gloom for the housing market however. The strong labour market conditions will keep buying capabilities afloat. In May this year, the Australian Bureau of Statistics recorded an all-time high in the nations employment to population ratio, with hours worked also steadily increasing this year.

“The trajectory of home values will depend on how fast and how high interest rates move, along with the performance of the broader Australian economy, labour markets and demographic trends,” said Mr Lawless.

“A stronger economy, along with the tightest labour market conditions in a generation, should help to ensure the ensuing housing downturn remains orderly.”


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