Pressure mounts on RBA to hike interest rates as property prices keep climbing

Date: 2021-14-03 19:41:02

Pressure mounts on RBA to hike interest rates as property prices keep climbing


Residential property prices continue to surge, jumping at the strongest monthly rate in more than 17 years last month, fuelling expectations interest rates will rise quicker than flagged by the central bank.

The latest CoreLogic data reveals home values swelled by 2.1 per cent in February, the biggest month-on-month change in the research group’s national home value index since August 2003.

The biggest gains were in the high end of the market – the top 25 per cent of property values – with a typical price for the combined capitals of about $1.2m.

That tier had the greatest volatility during the height of COVID-19 restrictions last year.

In the three months to February, home prices in Melbourne’s lifestyle market of the Mornington Peninsula, which proved popular during the health crisis, rose the most at 7.9 per cent.

Sydney’s northern beaches leapt 6.4 per cent, followed by a 5.3 per cent increase across the Baulkham Hills and Hawkesbury regions.

The out performance of the high end of the market is a common cyclical pattern during an upswing, CoreLogic says.

So too was the resilience of the low end of the market during last year’s downswing, but the rapid growth in first-home buyers targeting affordable properties in 2020 is expected to drop off this year as property values continue to rise and incentives are tapered.

The data comes after ANZ chief executive Shayne Elliott told 3AW’s Neil Mitchell last week that the supply and demand shortage that had driven house prices through the roof was unlikely to end any time soon and could easily spark an interest rate hike.

He told the broadcaster the surge in property prices had mainly been the only inflation within the economy so the Reserve Bank “would, I imagine, be forced to act at some point”.

The RBA says interest rates will remain steady at a record low of 0.1 per cent while inflation stays below the target level of 2 to 3 per cent.

But it is keeping a close eye on property prices, particularly with projections of a rise of up to 20 per cent over the next two years.

Canstar group executive of financial services Steve Mickenbecker said it had been the perfect storm for the property market, with demand running hot and stock being absorbed before or as soon as it hit the market.

“The fear of missing out is becoming a powerful psychological driver as government incentives and low interest rates have encouraged first-home buyers and home builders into the market in a rush,” Mr Mickenbecker said.

“Owners are loath to put a house on the market even at high current prices, fearing they will miss the boat getting back in.”

Mr Mickenbecker said the RBA looked likely to find itself under property price pressure a lot sooner than it had expected.

“The Reserve Bank doesn’t expect to raise the cash rate for three years or more, but unless property prices can be slowed it will have to start looking for some way to apply the brakes,” he said.

“First-home buyers and new construction are leading the charge for property buying rather than investors, so the Reserve Bank can’t enlist APRA to target investors with lending caps as it has done previously.”

But RateCity research director Sally Tindall doesn’t believe a rate rise will happen any time soon, noting the RBA had purposefully made it clear it did not intend to lift the cash rate until 2024 to gives consumers and businesses confidence to invest without having to worry about rising interest rates.

“It’s important to remember the record low cash rate isn’t just boosting the property market, it’s also helping stimulate other parts of the economy that still need a lift,” Ms Tindall said.

“If the government regulators do decide to intervene in the market, a hike to the cash rate is unlikely to be their first port of call.

“The regulators are more likely to respond to escalating property prices by scaling back government incentives or introducing news caps on risky lending.

“These limits have worked well in the past to reign in investor and interest-only loans when they were starting to spiral out of control.”

CommSec chief economist Craig James agreed a rate hike was not imminent.

“We expect no change in rates before 2024,” Mr James said.

“There will always be upside and downside risks, but there still remains significant slack in the job market.

“Unemployment would need to fall much more quickly than expected and wages lift sharply for any thought to be given to lifting rates.”

He said it was also important to note inflation remained low and was expected to remain so for the next few years, while JobKeeper would end in a few weeks.

“In addition, the foreign borders remain shut and the longer that they remain shut, the more risks this poses for the recovery,” Mr James said.

Meanwhile, new research commissioned by ING Australia reveals holiday towns are becoming just as appealing as city suburbs for property investors, with 32 per cent of survey respondents considering buying an investment property in a holiday hub compared with the inner city (30 per cent) and outer city (37 per cent) suburbs.

That’s particularly the case with Gen Z.

“During the pandemic, many Australians have flocked to holiday hotspots to either take a break or permanently relocate, with some also able to take advantage of flexible working,” ING head of home loans Julie-Anne Bosch said.

“It’s perhaps not surprising then that savvy property investors are spotting opportunities in these towns when traditionally they might have chosen to invest in properties in or around busy city hubs.

“Despite the increase in house prices, it’s clear from these findings that Gen Zers are financially savvy and looking at alternative ways to get on the property ladder.”

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