Industry reacts to ‘uncharted territory’ following June cash rate call

He insisted the June cash rate increase was necessary to “provide greater confidence that inflation will return to target within a reasonable timeframe”, adding, “if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment”.

However, his justification of yet another cash rate increase failed to convince a number of real estate industry experts who are seeing the effects of increasing mortgage payments play out firsthand.

Hayden Groves, president of the Real Estate Institute of Australia (REIA), said he believed “we are now at risk [of] driving the economy closer to a recession”, as a consequence of the latest cash rate call.

The president of Australia’s peak real estate body said the recent national wage case decision and the Consumer Price Index (CPI) data for April, which saw the figure rise from 6.3 per cent in May to 6.8 per cent, meant the June rate increase was expected.

However, even if the economic indicators point to a continuation of the cash rate’s upward trajectory, Mr Groves explained the RBA’s persistent lifting of the cash rate is certainly pushing some into dire financial straits, with banks reporting the accumulation of rate rises is “having an impact on some borrowers, with defaults starting to creep up”.

With April’s CPI increase largely driven by jumps in spending that are difficult to cut back on, such as housing, transport, and food, Dean Milton, chief operations officer at the Real Estate Institute of Queensland (REIQ), expressed concern about the “potential recessionary impact of these interest rate rises”.

Moreover, the REIQ is increasingly worried about the impact of the latest cash rate increase on lending confidence, especially considering building approvals in the Sunshine state over the year to April were over 2,500 below the same time last year, a trend Mr Milton believes is “showing the damaging impact interest rate rises are having on confidence”.

“Further, lending indicators show a 23 per cent decline in loans to owner-occupiers this financial year, and a decline of 27 per cent in investor activity — returning the housing market to the early days of COVID,” he said.

“As governor Lowe stated, it is now up to the government and business to drive capital investment to ease supply constraints in the economy,” Mr Milton added.

And not to focus solely on mortgage holders, Mr Milton spoke to the current plight of renters, stating: “This rate rise will further the hardship of tenants, especially those on low incomes, when striving to enter home ownership, both saving the deposit and simply qualifying for a loan.”

He called on the Australian Prudential Regulation Authority (APRA) to reduce their serviceability to pre-December 2021 levels given Queensland needs “more investors to bring rentals to the market and opportunity for tenants to realise their dreams of home ownership”.

Casting a broader gaze at the wider Australian property market, CoreLogic’s head of research, Eliza Owen, noted, “in the short term, the June rate rise may take some steam out of the housing market”.

“For the past two decades, there has been a strong negative correlation between movements in the RBA cash rate and the CoreLogic Home Value Index,” she explained.

“However, like many economic trends since the pandemic, the housing market has defied expectations,” she explained, adding continually increasing demand driven by rising overseas migration, a lagged return to pre-pandemic household sizes in capital cities, and low levels of stock mean “the June rate hike may only serve to take some steam out of the recovery trend in housing values, rather than reverse recent gains”.

Following the RBA’s concession on Tuesday (6 June) that wrangling inflation is proving harder than anticipated, Geoff Lucas, managing director and group chief executive officer at The Agency, believes “it is now more likely than ever that the mortgage cliff will hit and hit harder than first anticipated”, especially as around 850,000 fixed rate loans are expected to shift to variable rates between July and December.

Looking at the situation through a lens of positivity, Mr Lucas believes “the price volatility that has been in the marketplace is continuing to subside and people can transact with more certainty than they have had in recent months and years”.

Moving forward, Mr Groves said the RBA “cannot be immune to the political pressures with small business and young families holding a mortgage most impacted by the latest rate increase”.

“The pace of rate increases leaves the economy in uncharted territory with the official cash rate now at its highest level in more than a decade. Some underlying inflationary pressures in the economy cannot simply be fixed by hiking interest rates,” he concluded.