Analysts and economists say the negative impact of higher interest rates on Australian house prices, household spending and residential investment could hurt consumer confidence and increase the likelihood of a recession in Australia.

 

The Reserve Bank of Australia raised interest rates for the third time this week. To keep inflation in check, the bank joined the world's central banks in raising the cash rate by 50 basis points to 1.35%, following two previous hikes of 25 and 50 basis points this year.

 

AMP Australia senior economist Diana Mousina expects a 15 per cent to 20 per cent "peak-to-trough" fall in house prices in Australia's capital cities in 2023. On Tuesday, she said such a drop would be a "major blow" for households.

 

 

 

"In Australia we've seen some small corrections over the decades, but (15%-20%) would be a pretty decent drop," she said. "We've clearly seen a huge increase in house prices during the last two-and-a-half years of the pandemic. , because we have a very strong property market and there is a lot of demand in regional Australia. It's just a small hit for households...because when house prices fall, there's a wealth effect."

 

Su-Lin Ong, chief economist at RBC Capital Markets, said she expects Australian house prices to fall by 19 per cent from peak to trough, which could be a "considerable" hit to consumer confidence. But she also said the declines in these forecasts were smaller than the nearly 40 per cent rise in house prices over the three years since 2019.

 

Figures from property data providers such as Corelogic show that in the three years since 2019, the 40 per cent increase (mainly in Australia's big cities) was higher than in other boom periods, including the most recent five years between 2012 and 2017, when Home prices in places like Sydney and Melbourne have risen by as much as 50 per cent.

 

Markets are expecting more rate hikes from the RBA. Economists predict that rates could rise to between 2.5% and 2.85%.

 

Australian house prices fell for the first time in February after a surge during the pandemic, with dwellings rising more than apartments.

 

House prices have risen rapidly over the past three years as the Reserve Bank of Australia kept interest rates ultra-low to cushion the economic downturn caused by the pandemic. Low interest rates have driven home purchases, mostly by Australian residents and first-time buyers, rather than investors or overseas buyers.

 

But that's all changing as interest rates start to rise. The national auction clearance rate and number of auctions - a barometer of Australia's housing boom - have started to fall. Figures from Corelogic show fewer auctions in the past week compared to the same time last year. Only 55 per cent of homes were listed successfully, compared with 72 per cent at the same time last year, the data showed.

 

Tim Lawless, head of research at Corelogic, said in the firm's monthly price update report last week: "Given that inflation is likely to remain high for some time, and interest rates are expected to rise significantly, the rate of decline in house prices is likely to continue to accelerate. , and become more common.”

 

Capital Economics senior ANZ economist Marcel Thieliant said the rate hike could hit housing investment next year, "bringing the economy closer to a recession". However, Theliant is more optimistic about consumer spending, noting that household savings rates have been healthy.

 

Lawless is less certain, considering Australian household debt has reached a record high this year, adding that 77 per cent of debt is related to housing. "Households may be more sensitive to rate hikes as debt levels in the real estate sector hit record levels," he said.

 

However, National Australia Bank expects Australian house prices to fall by 18 per cent from peak to trough. With Australia not experiencing a housing glut, the bank doesn't see a "disorderly" downturn.

 

Housing affordability, on the other hand, will worsen as interest rates rise, and despite falling house prices, remains at one of the highest levels globally, according to Moody's Investors Service MIS.

 

The latest figures from the Australian Bureau of Statistics show median house prices have risen in Sydney and Melbourne, the two largest cities. Sydney house prices rose 16 per cent year-on-year to A$1.25 million (US$850,000) in the first quarter of this year, while Melbourne prices rose 9 per cent to nearly A$1 million (US$680,000) over the same period.