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With its eighth consecutive cash rate, the Reserve Bank of Australia (RBA) has compounded the financial woes of many Australians.
The central bank gifted the public the financial equivalent of stocking coal with a 25-basis-point cash rate increase at its monthly board meeting on Tuesday, 6 December, taking the rate to its highest point in nearly a decade — 3.10 per cent.
In doing so, the RBA created an environment that could lead to “sticker shock” amongst many Australian lenders, according to CoreLogic Australia’s head of research Eliza Owen, who cited the fact the 300-basis-point buffer on home loan serviceability introduced by APRA in October last year had now been met.
Ms Owen explained that “new variable home loan rates for owner-occupiers increase from a low of 2.41 per cent in April 2022 to 4.58 per cent in October”.
Should lenders opt to pass November and December’s cash rate increases on to customers in full, the average new variable rate will rise to 5.08 per cent.
Even with slight Australian economic shifts occurring — including retail sales, new dwelling approvals, and rental growth all declining slightly over the previous few months — Ms Owen conceded that “there are still some indicators it is too early for a pause in the rate tightening cycle”.
Past cash rate increases have begun “flowing through to lower volumes of new mortgage finance secured”. That’s highlighted by the fact that from May to October, the monthly value of secured finance fell 17.9 per cent.
Additionally, annual sales are down 13.3 per cent compared to this time last year, while consumer sentiment through November dropped 6.9 per cent.
LJ Hooker Group head of research Mathew Tiller said declining rates of sales and new listings is a sign that “vendors are being more cautious than buyers in the current market market”.
“There is always a base level of those who have to sell, whether it is due to personal reasons, but we are also seeing some people list their property in order to downsize their mortgage,” he said.
He believes the RBA’s rate-rising cycle, which may conclude during the first quarter of 2023, will invite sellers currently sitting on the sidelines into the market, though he advised those looking to pursue this route to begin preparations now.
With the cash rate having entered the threshold of the major bank’s October forecasts, which ranged from 3.10 per cent to 3.85 per cent, Ms Owen stated that “the higher rate environment will test housing market conditions in 2023, when the majority of outstanding fixed-term mortgages are expected to expire”.
HIA weighs in
Chief economist at HIA, Tim Reardon, slammed the RBA’s 25-basis-point increase, stating the central bank “will not restore the economy to stable growth by putting the housing industry through boom-and-bust cycles”.
“Home building was already set to slow significantly in 2023, and today’s rate rise will exacerbate this downturn,” he added. “The number of new loans for the construction or purchase of new homes has fallen to its lowest level in over three years.”
These figures are consistent with additional lending indicators, such as HIA’s New Home Sales survey, which shows sales fell 37 per cent in the four months to October.
Mr Reardon said that “the risk[s] to household and business finances from such an overly aggressive hiking cycle are clear. A deep and prolonged trough in home building activity will jeopardise the return of the economy to stable growth.”
Why borrowers should look at refinancing
In anticipation of Australia’s “big four” banks passing the increase on in full to mortgage holders, RateCity research director Sally Tindall has implored mortgage holders to consider refinancing in order to “inject ongoing relief into [their] budget”, especially as further cash rate increases are likely.
“Switching banks might seem as appealing as sticking pins in your eyes. However, with many lenders now offering applications in less than an hour, it should leave people time to apply and still get to the beach,” Ms Tindall said.
According to figures released by RateCity in the aftermath of the cash rate increase, an individual with a $500,000 loan can save up to $5,948 after one year of switching from the average rate of 5.86 per cent to a rate below 4.5 per cent. After three years, the savings can increase to $19,451.
For borrowers with a $750,000 mortgage who undertake the same refinancing option, their savings could begin at $9,370 after one year and rise to $29,648 after three.
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