The Commonwealth Bank has announced a 9 per cent increase in profits, despite a fall in its margins.
Key points:
CBA has posted a statutory net profit of $9.7 billion
The bank will pay a final dividend of $2.10, fully franked
CBA says most of its customers are well placed to afford rising interest rates, but 37 per cent are less than a month ahead on repayments
The bank made a net profit of $9.7 billion over the 2021-22 financial year and its preferred measure of cash profit, which excludes a range of one-offs, rose 11 per cent to $9.6 billion.
The increase in profits came despite a steep fall in net interest margin (NIM) — the gap between the rate the bank pays to borrow money and the rate it lends it out at and its main source of profits.
NIM fell 0.18 percentage points to 1.9 per cent, driven by lower home loan margins in an ultra-low interest rate environment.
Analysts expect the NIM to grow as the recent jump in interest rates is passed on in full to mortgage borrowers but only in part to savers.
The bank made up for falling profit margins on its loans by growing home lending by 7.4 per cent and business lending by 13.6 per cent, although its growth in home lending was slightly below its competitors.
CBA has expressed confidence that its customers will be able to keep up their repayments in the face of rapidly rising interest rates.
It said two-thirds of its customers had direct debits above their minimum required repayments at the current level of interest rates, although this would drop to a quarter if the cash rate rose to CBA’s forecast peak of 2.6 per cent.
The bank also noted that more than a third of its mortgage customers were at least two years ahead in their repayments, with around half at least three months ahead
However, 22 per cent are only paying just on time, while a further 15 per cent are less than one month ahead.
CBA’s economists are tipping home prices to fall at least 15 per cent from peak to trough, largely because rising interest rates are reducing borrowing capacity.
Most households can only borrow about the same amount or less than they could in 2016, while property investors have seen their borrowing capacity cut.
Commonwealth Bank shareholders will receive a final dividend of $2.10 per share, taking the full-year payout from the bank to $3.85.
Deep divisions are emerging among some of Australia’s leading bank economists on their outlook for interest rates and the Australian economy.
Key points:
The major banks are split on cash rate forecasts, with Westpac and ANZ tipping a peak of 3.35 per cent and CBA 2.6 per cent
Westpac’s chief economist warns inflation could get out of control if the RBA does not keep lifting rates decisively
CBA’s head of Australian economics is warning of recession and housing crash risks if the cash rate passes 3 per cent
In one camp are those, such as the economists at Westpac and ANZ, who believe that the cash rate target will pass 3 per cent before the end of this year.
Both are tipping the RBA’s benchmark official rate to peak at 3.35 per cent — it is currently 1.85 per cent — meaning interest rates would almost double from where they are, rising by another 1.5 percentage points over the next six months or so.
The cash rate target was just 0.1 per cent at the beginning of May.
In fact, Westpac’s chief economist Bill Evans is not only predicting the cash rate will get to 3.35 per cent, but arguing it must if the Reserve Bank is serious about bringing down inflation.
Westpac is expecting the cash rate to hit 3.35 per cent, but CBA thinks it will top out at 2.6 per cent before falling next year.(abcnews)
“The key reason why we insist that a sharper slowdown in demand is required in 2023 is that a much stronger set of demand conditions … runs the risk of resilient high inflationary expectations,” he wrote in response to the RBA’s Statement on Monetary Policy, released on Friday.
The Reserve Bank used market forecasts of a 3 per cent cash rate to underpin its latest economic forecasts, which did not have inflation falling back even to the top of its 2–3 per cent target range until the end of 2024.
Mr Evans said those forecasts showed that the RBA should raise rates more aggressively, even at the expense of slower economic growth — Westpac’s modeling tips annual economic growth of just 1 per cent next year if rates hit 3.35 per cent.
“Such an approach would give the bank the best chance of managing this difficult task of returning inflationary expectations to more normal levels and deflating the current ‘inflationary psychology’ which is now at risk of taking hold,” he said.
Too many rate rises could ‘take the economy backwards’
Then there is the other camp of economists, represented by the Commonwealth Bank and NAB among the big four, who cannot see the cash rate getting above 3 per cent in the near future.
“I don’t think it’s likely to happen because I think the Reserve Bank, once they get the cash rate to around their estimate of neutral [somewhere near 2.5 per cent]will want to pause and actually see how the economy’s responding to the rate hikes that they’ve delivered,” CBA’s head of Australian economics Gareth Aird told RN Breakfast.
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Is Australia at risk of a recession? – Monday Finance with Michael Janda
“They are putting through a lot of tightening in a very short amount of time and, if they continue to hike at the rate that they’re doing and just keep going all the way to 3 per cent and even above that level, they’ re not going to be able to actually assess the impact that those hikes are having on the economy in that in that amount of time.
“Now, it’s possible that they end up taking the cash rate to those levels, but I think if they do that, they’ll end up reversing gear in the not too distant future because … we have a highly indebted household sector in Australia and rate rises of that magnitude will just put too many households under stress and I think that will ultimately take the economy backwards.”
The Reserve Bank has recently changed its language slightly to emphasize that “it is not on a pre-set path”.
“The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labor market,” RBA governor Philip Lowe said after last week’s latest half-a-percentage-point rate rise .
Mr Aird is taking the RBA at his word and believes the economic data will soon give it reasons to stop raising rates.
“I think we’re going to see in the not-too-distant future that the economy is slowing down pretty materially, given how quickly they’ve taken the cash up right now,” he said.
Mr Aird bases that view in large part on CBA’s own in-house economic data, drawn from the millions of customers who bank with Australia’s largest financial institution.
“I think the RBA has tended to focus on aggregates whereas, internally, we look at disaggregated data,” he explained.
“What it indicates to us is that there’s a lot of households that will feel the impact of the rate hikes immediately. As a result of these rate hikes, they’ll have to adjust the way they’re spending money.
“That then has an impact on household consumption.”
AMP Capital’s chief economist Shane Oliver does not have access to the wealth of internal data at CBA but has observed other early indicators that the economy is losing steam.
“There is tentative evidence that this is starting to show up in slowing consumer spending with credit and debit card transactions looking like they are slowing, hotel and restaurant bookings looking like they are rolling over, and July retail sales implying now falling retail sales in real terms,” he wrote in a recent note.
Dr Oliver has the same 2.6-per-cent peak cash rate forecast as Gareth Aird, and for similar reasons.
“A rise in the cash rate to 3 per cent or more would push total mortgage repayments [i.e. interest and principal] to record highs relative to household income,” he observed, noting that the situation would be even worse for recent home buyers.
“Averages can be deceiving — a bit like having one arm in the freezer and one in the oven and saying on average you are okay.
“While RBA analysis shows that just over one-third of households with a variable rate mortgage will see no increase in their payments with a 3 per cent rise in interest rates, more than a third of all households with a mortgage – whether variable or fixed — will see a greater than 40 per cent increase (and much more so for those on fixed rates).
“Roughly speaking, this is about 1.3 million households.”
Risk of housing crash amid ‘forced sales’
Dr Oliver warned that these households are facing a triple whammy — rising rates, falling real wages and a decline in the value of their homes.
“[Rising mortgage repayments]at a time of falling real wages, will have a huge impact on spending in the economy and risk a significant rise in forced property sales,” he noted.
“Coming at a time when home prices are already falling rapidly due to the impact of rising rates on home buyer demand, it will only add to home price falls, which will weigh further on consumer spending.”
Even though the Reserve Bank does not have any mandate to target property prices, Gareth Aird agreed with Shane Oliver that it would be a major consideration, given the effect that a perceived fall in wealth is likely to have on consumer spending.
CBA’s forecast is for a major property market correction that risks turning into what market traders would generally define as a crash — where prices fall at least 20 per cent from their peak.
“We’re looking for around about 15 per cent peak to trough — that’s conditional on the cash rate getting to 2.6 per cent,” he said.
“If the RBA was to take the cash rate higher than that then we’d be forecasting a bigger fall in home prices.”
However, Mr Aird does not think that is likely.
“We’re actually thinking that rates will go down in the second half of next year, such is the weight that these higher rates will actually have on the household sector.”
Shane Oliver is also optimistic that the cash rate will not need to rise much further to tame inflation, as some of the biggest price rises stop of their own accord.
“Core inflation in the US is showing signs of having peaked and Australia appears to be following the US by about six months, pointing to a peak in inflation here later this year,” he argued.
“A return to more normal weather after the floods should also help lower local food prices.”
The difference between a 2.6 per cent cash rate and a 3.35 per cent cash rate is around $284 a month for someone with a 30-year $600,000 mortgage, so a lot of Australians with home loans will be barracking for Aird and Oliver in the battle of the forecasts.
Staring down the possibility of taking out a large mortgage to buy a house they could barely afford, Luke Saliba and his wife Claire Gooch decided to try something different.
Instead, the young couple moved in with Claire’s mother Sylvia and took out a much smaller mortgage to renovate her house.
“The idea of the nuclear family being disconnected in the suburbs [feels] like it’s been forced upon us over the last 100 years,” Luke said.
“I feel like us challenging that, in this small way, is almost going back to the way things should be.”
Luke says having a European background means there’s “no stigma attached to living with grandparents”.(ABC News: Rhiannon Stevens)
The living arrangement has allowed Sylvia to stay in her home which was becoming too costly for her to maintain alone.
“I get to stay in a house that I quite like, in an area where I have established friends — it meant that I wouldn’t have any issues,” she said.
Sharing the house has also benefited Luke, Claire and their two young children.
Claire said having a small mortgage of around $350,000 and living in an area with good services meant they were better able to manage financially as the cost of living rises.
“My daughter needs surgery for grommets and adenoids and tonsils,” she said.
“If we didn’t live like this, that would be a problem and we’d be having to make choices between food, rent bills and medical things that the kids have needed.”
Claire says living with her mother is a great choice but acknowledges that not everyone has the opportunity to tap into generational wealth in this way.(ABC News: Rhiannon Stevens)
Having another adult in the house also meant she and her husband could turn to her mother for advice.
“My mum is very different to how I am and that’s been really good because my kids get stuff that I wouldn’t be able to do with them [and] I get ideas that I wouldn’t have had.”
The living arrangement worked because they tried to relate like housemates, not mother-daughter, she said.
“This is a group house where we’re related, and because we have similar backgrounds … we can probably live together a little bit easier, but living with my daughter is not always easy, but that goes both ways, right?” Sylvia said.
Luke, who is the grandchild of Spanish and Macedonian immigrants, said having a European background meant there was no stigma attached to living with grandparents, and he valued the presence of an older generation in the house.
“If any of us have a bad day, we don’t have to travel to go and touch base and provide that family support. We’ve got it in-house,” he said.
Sylvia loves being involved in the daily lives of her grandchildren.(ABC News: Rhiannon Stevens)
Multi-generational households growing
Edgar Liu, a senior research fellow at the UNSW’s City Futures Research Centre, said economic circumstances were often the driving factor for people choosing to live in a multi-generational setting.
Dr Liu, who researched multi-generational living over several years and defined them as households with more than one generation of adults, said data from the UK and US showed that the economic shock of the Global Financial Crisis (GFC) increased the number of multi -generational households in those countries.
Edgar Liu says multi-generational households are increasing.(Supplied UNSW)
“From the US, in particular, there is evidence that [showed] a normal rate of growth was about 1.5 per cent, for this kind of household,” he said.
“[That] doubled to about 3 per cent as the GFC came on, and then it continued for a couple of years before it died back down to the normal rate of 1.5 per cent.”
The Australian Bureau of Statistics (ABS) provided new data to the ABC on households containing three generations.
It showed a small increase in three generational living arrangements over recent years, from 275,000 in 2016 to 335,000 in 2021.
But Dr Liu said the largest growth in Australia had occurred in households where two generations of adults lived together.
While finance, especially the cost of care for both the young and the elderly, influenced people’s decisions to form multi-generational households, Dr Liu said family connection was the benefit most often cited once people had experienced such living arrangements.
But he said in Australia this style of living was still stigmatized.
“Acceptance was very conditional, you had to have a reason to do this, you can’t just want to do it,” he said.
“[For example] your mother was in a wheelchair so that’s why she had to live with you,” was seen as an acceptable reason, Dr Liu said, but if someone simply enjoyed living with their mother it would raise questions.
A favorite family activity at Irina’s house is cards.(ABC News: Rhiannon Stevens )
The solution to isolation
Irina Kawar has always lived surrounded by generations of family, and she wouldn’t want it any other way.
Irina believes a “joint family”, as it’s called in India, can solve much of the isolation and loneliness experienced in Australia today.
“This is a very good solution for the people who feel isolated because isolation is as big a problem in old age as it is in teenagers,” she said.
“It’s a win-win for everyone, isolated teenagers, isolated grandparents — together, they are happy.”
For Irina, living with her in-laws, husband and two daughters also makes financial and emotional sense.
Irina says living with anyone — child, partner or parent — involves sacrifices, but the benefits outweigh the challenges.(ABC News: Rhiannon Stevens)
She said she never felt alone or frustrated learning to be a parent when her children were young because she always had family around to support her.
As migrants in Australia, having grandparents in the house also helped her children maintain a connection to Indian culture and language, she said.
“[The grandparents] follow daily religious practices, so I don’t have to make an additional effort to bring this into [the girls’] life, they can grow up around those practices as naturally as my husband and I did,” she said.
“If it was just the two of us raising our girls, we would need to make the conscious effort to talk to them in Hindi but living with grandparents — they just learn Hindi naturally.”
For those who have never tried living beyond the nuclear family unit, Irina understands there might be trepidation.
But she said sacrifices were made whoever you lived with, whether it was a partner, child, parents or extended family.
“A little sacrifice is all it takes, but the benefits are great.”
Nina Xarhakos has moved in with her mother Maria, and has become her primary carer.(ABC News: Rhiannon Stevens)
Caring for Maria
Decades since she last lived with her parents, Nina Xarhakos moved in with her mother Maria in 2020.
At 92, Maria suffers mobility issues and was becoming isolated after the death of her husband and several close friends, as well as the closure of her Greek social club due to COVID-19.
“I’ve worked in the community sector with Greek-speaking elderly, [so] I’m very aware of how prevalent depression and anxiety is among the elderly,” Nina said.
She said she respected her mother’s desire to stay at home as long as possible.
“It’s satisfying to me to be able to make that sort of contribution towards her quality of life and I think it strengthens our relationship as well.”
Nina said her mother would feel less comfortable receiving care from outside providers and it was becoming increasingly difficult to find carers with the language and cultural skills to care for someone like her mother whose English was limited.
“I was born in Greece and I came to Australia when I was seven, I’m the daughter of migrants, I’m bilingual and bicultural,” she said.
“I have a greater understanding than, let’s say, a 20-year-old who’s born here who has limited Greek speaking skills and understanding of the Greek culture.”
While she was enjoying this time living with her mother, Nina said carers made large sacrifices and received little financial support.
With a grown daughter and no partner, Nina said she was in a position to become her mother’s carer, and the living arrangement was benefiting them both.
“I’m learning certain skills from my mother, she’s passing on customs and traditions that I hold dear as well. So there’s a lot to learn from someone with such wisdom and such capacity.”
The Reserve Bank has slashed its forecasts for economic growth as rate rises, house price falls and a souring global economy weigh on Australia’s outlook.
The bank has dramatically scaled back its forecasts for household consumption, which accounts for about 60 per cent of Australia’s economy.
“Higher consumer prices, rising interest rates and declining housing prices are expected to weigh on growth in private spending, at the same time as growth in public demand slows,” the bank noted in its latest Statement on Monetary Policy.
The bank slashed its consumption forecast for the middle of next year from 4.4 per cent to 2.8 per cent, echoing the results of surveys that show consumer sentiment approaching recessionary levels.
Higher interest rates are expected to be a major factor behind tightened belts, with the RBA basing its forecasts on an assumption that its cash rate would hit 3 per cent by the end of the year – up from 1.85 per cent currently – before falling back a little by the end of 2024.
It is important to note that this is not an RBA forecast for the cash rate, but an assumption based on market pricing and economist forecasts.
The outlook for Australia’s gross domestic product (GDP) has been cut by a full percentage point from around 4.2 per cent for December 2022 to 3.2 per cent.
Those cuts continue for the rest of the forecasting period, with the economy expected to grow just 1.75 per cent for the next two years.
Falling house prices, combined with the previous construction boom inspired by ultra-low interest rates and the previous government’s HomeBuilder grant, will result in dwelling investment falling sharply (-4.8 per cent) over 2024.
State and federal governments are also not expected to provide any assistance, with expectations that public spending will shrink next year.
Real wages to keep shrinking
Despite the slowdown in GDP growth, the RBA expects the jobs market to remain strong.
It is now predicting that unemployment will bottom out at about 3.25 per cent later this year before gradually creeping back up to 4 per cent by the end of 2024, as economic growth slows and migration flows start to ease some labor shortages.
Despite this leading to a modest pick-up in wage rises to about 3.5 per cent next year, the Reserve Bank still expects real wages to fall for at least the next year – that is, prices will keep rising faster than pay packets.
After peaking at 7.75 per cent by the end of this year, inflation is still expected to be about 6.2 per cent by the middle of next year, and 4.3 per cent at the end of 2023.
A key reason for this will be further pain for electricity and gas users.
“Contacts within the bank’s liaison program generally expect further significant increases in retail electricity prices in 2023,” the RBA observed.
“This is largely because the recently announced regulated price increases for 2022 were decided before the latest run-up in wholesale prices and because wholesale prices are expected to remain elevated.”
Consumers can also expect to see more manufacturers and retailers passing the increased cost of their inputs on in retail prices.
“A significant share of firms in the bank’s liaison program have increased prices or expect to do so over the coming months as a result of earlier increases in input costs,” the report noted.
“Some upstream cost pressures are showing signs of easing but it will take some time before this affects prices paid by consumers.”
Risks ‘skewed to the downside’
However, even those downgraded forecasts remain vulnerable to a weaker global economy.
The IMF recently slashed its global economic forecasts, while the Bank of England overnight warned of a long recession in the UK even as it raised interest rates there by half a percentage point.
“The risks to the global outlook are skewed to the downside,” the RBA warned.
“The synchronized nature of the tightening in monetary policy globally could prove quite contractionary, and is occurring at a time when fiscal policy is offering less support.”
Closer to home, the Reserve Bank has an eye on Australia’s biggest trading partner, where economic growth has virtually ground to a halt in recent months.
“Restrictions to control the spread of COVID-19 in China led to an unexpectedly large contraction there in the June quarter; further outbreaks could both weigh on growth in China and disrupt global supply chains,” the bank cautioned.
“The Chinese economy is also contending with weak property market conditions and increasing levels of distress among developers.”
After two days of silence, Commonwealth Bank has finally confirmed it will lift interest rates on its variable mortgages by 0.5 percentage points.
This makes CBA the first of the “big four” banks to pass on the Reserve Bank’s latest rate hike.
The RBA lifted its cash rate target by 0.5 percentage points on Tuesday, taking the new rate to a six-year high of 1.85 per cent.
It was no surprise that the commercial banks would pass on the RBA’s rate increase to their borrowers.
However, the surprising aspect is how uncharacteristically slow the banks have been in making such announcements in the past couple of days.
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Reserve Bank hikes interest rates for fourth consecutive month(Rhiana Witson)
CBA’s main rivals — Westpac, NAB and ANZ — still haven’t provided any update on their new borrowing rates.
Australia’s fifth-largest lender, Macquarie Bank, was the first bank to lift its rates — within hours of the RBA’s decision on Tuesday.
This was followed on Wednesday by ubank — an NAB subsidiary — announcing it would lift its savings rates by 0.5 percentage points in September.
Delay in being the first mover
“This kind of waiting game is unusual, but not unprecedented,” said Sally Tindall, the research director of RateCity.
“Back in 2010, three of the big four banks took between eight and 10 days to make announcements following the 0.25 percentage point RBA hike on 2 November.”
“The delay could be a worrying sign for savers. It’s possible the banks are still mulling over whether they will pass on the full hike to all their savings customers.”
“However, the big four banks could just be playing a game of chicken to see which one of them moves first.”
CBA increased its the standard variable rates for its borrowers by 0.5 percentage points.
The bank also said it would increase the rate on “select savings products”, meaning it has not passed on the RBA’s full rate hike to all savers.
The Reserve Bank has increased interest rates for the fourth month in a row, raising its cash rate target by half a percentage point.
Key points:
The RBA has raised interest rates by 0.5 of a percentage point
The cash rate target has now increased by 1.75 percentage points since the start of May to 1.85 per cent
The rise in the cash rate since early May will add about $472 a month to repayments on a $500,000 loan
The RBA has now lifted its benchmark interest rate by 1.75 percentage points since its first rate rise in May, with the cash rate target sitting at 1.85 per cent.
In his post-meeting statement, Reserve Bank Governor Philip Lowe said the latest rate rise was unlikely to be the last this year.
“The board expects to take further steps in the process of normalizing monetary conditions over the months ahead, but it is not on a pre-set path,” he said.
“The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labor market.
“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”
Besa Deda is the chief economist for St George Bank and Westpac Business Bank.(ABC News: Daniel Irvine)
St George Bank chief economist Besa Deda said the Reserve Bank had already raised rates faster than any time since 1994, but she expected more.
“We think their cash rate could have a 3-handle on it by the end of this year, because inflation is running at its fastest rate since the early 1990s,” she told The Business.
“We are expecting that the Reserve Bank will deliver rate hikes for every board meeting until February next year.”
‘Real risk’ of recession
Mr Lowe acknowledged that it would be a difficult task.
“The board places a high priority on the return of inflation to the 2-3 per cent range over time, while keeping the economy on an even keel,” he warned.
“The path to achieve this balance is a narrow one and clouded in uncertainty, not least because of global developments.”
The managing director of EQ Economics and former ANZ Bank chief economist, Warren Hogan, warned that a recession was a “real risk” if the Reserve Bank raised interest rates too fast.
“I think they just need to be patient with this tightening cycle and try and get this inflation under control over a couple of years, rather than rush it and try and get it done within a year,” he cautioned.
He also told the ABC’s AM program that many of the threats to the economy were partly of the Reserve Bank’s own making.
In particular, he singled out the RBA’s statements until late last year that interest rates were unlikely to rise from near-zero until at least 2024, which he said lured many people to borrow too much money.
“I think the first home buyers are the ones who have the most significant grievance,” he told AM.
“When they first start that, they’re the most vulnerable to higher rates. And to be told by the central bank that rates will stay where they are, no matter how much conditionality they put on it, that nuance is lost on the broader community.
“And now they’re staring down the barrel of the most significant tightening of monetary policy in the modern era.”
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The Reserve Bank’s rationale behind fourth successive hike
Figures from RateCity show the latest rate rise, if passed on in full by banks, will add another $140 a month to repayments on a $500,000 home loan.
Since rates started rising on May 3, someone with a $500,000 loan would be paying $472 a month more if their bank had simply matched the RBA moves.
‘It’s gonna be rough’
Man Huynh is one of those first home buyers struggling with the unexpected surge in mortgage repayments.
Man Huynh said he was told to expect no more than a percentage point of rate increases when he purchased his first home in October 2021.(ABC News: Rhiana Whitson)
He also owns two adjoining businesses in the Melbourne suburb of Footscray, selling hot dogs and bubble tea.
With annual inflation hitting 6.1 per cent and interest rate hikes, Mr Huynh is being hit by multiple cost pressures at work and at home.
“Everything’s going up — our bread, our rent, our insurance, everything. Even our wages are going up,” he said of his business costs.
Mr Huynh bought his first house in October last year and, even before today’s rate rise was passed on, his lender Pepper Money had increased his variable interest rate from 3.8 per cent to 5.37 per cent.
“It’s gonna be rough, we don’t know when it’s gonna stop.”
The steep increase in the cost of his mortgage was unexpected for Mr Huynh, who said his mortgage broker told him interest rates would likely only rise by between half to 1 percentage point.
“If you hear that it will only go up by a half per cent, then yes, you go and buy the house,” Mr Huynh said.
Mr Huynh said he would have made different decisions if he had known interest rates would rise this hard and fast.
“Definitely, I would have delayed purchasing my first time,” he said.
Mr Huynh’s climbing expenses come at a time when business is far from back to normal, and he has closed his other outlets to focus on his Footscray site.
“We are in front of a train station, we are in a prime position, yet no one’s catching the train, and everyone is still working from home,” he added.
Housing market, consumer confidence tumble
The rapid rise in interest rates since the start of May, combined with the high inflation that triggered the RBA’s moves, has seen consumer-confidence levels sink to depths usually seen during recessions.
House prices have also started falling rapidly in Australia’s largest cities, while they are softening in other parts of the nation as well.
“It hasn’t taken four Reserve Bank cash rate rises to slow down new borrowing, with the latest ABS new loan commitments showing that new housing lending fell in June by 4.4 per cent,” Canstar finance expert Steve Mickenbecker said.
“New borrowing has now fallen below last year’s level but is still up on pre-pandemic volumes.
“With more rate increases ahead, buyers and sellers are nervous about what is to come from this year’s spring selling season. Investors, who were previously the most bullish sector, are leading the exit.”
Federal Treasurer Jim Chalmers is warning the latest RBA decision will “sting”, even though Australian households have been bracing for further rate rises.
“Families will now have to make more hard decisions about how to balance the household budget in the face of other pressures, like higher grocery prices and higher power prices, and the costs of other essentials,” he told parliament just seconds after the RBA announcement was made.
“This decision doesn’t come as a surprise.
“It’s not a shock to anybody, but it will still sting.”
He argued the warning signs were clear prior to the election, and the federal government’s budget bottom line would also take a hit as a result.
Shadow Treasurer Angus Taylor said Mr Chalmers’ comments would be cold comfort to Australians doing it tough, and demanded more detail soon on any cost of living relief being planned by the government.
“It’s the fourth interest rate increase in a row, we’ve got the highest inflation since the early 90s,” Mr Taylor said.
“We want to see a plan, we don’t want to have to wait till the budget.”
House prices in Australia are dropping at their fastest pace since the global financial crisis — and market conditions are “likely to worsen” as interest rates continue to rise, according to property analytics firm CoreLogic.
Key points:
Economists predict Australian house prices could fall between 12 and 20 per cent
The median property value dropped 8.5pc during the GFC
Rents have arisen 9.8pc in the past year
The latest data shows that the nation’s median property value has dropped by 2 per cent since the beginning of May, to $747,182 (a figure which includes houses and apartments).
“Although the housing market is only three months into a decline … the rate of decline is comparable with the onset of the global financial crisis (GFC) in 2008, and the sharp downswing of the early 1980s,” said CoreLogic’s research director Tim Lawless.
But he noted that, on average, prices had jumped 28.6 per cent from mid-2020 (the low point of the housing market during the COVID-19 pandemic) to April 2022 (when national prices hit their peak).
Regional Australia had an even bigger surge, with prices up 41.1 per cent in two years — as smaller towns outside the capital cities experienced a huge influx of city-dwellers seeking better lifestyles (as working remotely became the new normal).
“In Sydney, where the downturn has been particularly accelerated, we are seeing the sharpest value falls in almost 40 years.”
Property prices in Sydney, Melbourne and Hobart fell sharply in July.(CoreLogic)
The median price in Australia’s most expensive city fell by 2.2 per cent in July (taking its quarterly loss to 4.7 per cent). Despite that, an average house in Sydney still costs around $1.35 million, while an average unit may fetch about $806,000.
Melbourne and Hobart also recorded steep falls, with prices in both cities down 1.5 per cent last month, while Canberra prices dropped 1.1 per cent.
Prices in Brisbane and regional Australia fell 0.8 per cent (their first monthly decline since August 2020).
At the other end of the spectrum, Darwin, Adelaide and Perth were the only capitals where prices actually went up in July (by between 0.2 and 0.4 per cent). However, it has been a sharp slowdown since May, when the Reserve Bank began to aggressively lift the cash rate from its record low levels.
short and sharp
“I think this downturn will be similar to the global financial crisis in that it will be quite short and sharp,” Mr Lawless told ABC News.
Australia’s median property price fell by around 8.5 per cent over an 11-month period during the GFC, according to CoreLogic.
Adelaide property prices jumped 3.6pc in the past three months.(CoreLogic)
Mr Lawless said the property downturn is “accelerating”, and that he would not be surprised if “the current decline gets worse than what we saw during the GFC”.
He noted the main difference is that governments and central banks are currently determined to withdraw trillions of dollars worth of stimulus, in a desperate bid to lower inflation (instead of pumping it into the global economy, liked they did after the 2008 crisis).
Many analysts are predicting Australian property prices, on average, will fall between 10 and 20 per cent (from peak to trough) — with the two most expensive cities Sydney and Melbourne likely to suffer the biggest declines.
But even if the worse case scenario eventuates, it will not drastically improve housing affordability.
“If we saw say, a 15 per cent drop in national housing values, it would take prices back to where they were in about April 2021.”
How quickly (and by how much) prices fall will depend on how aggressively the RBA decides to lift its cash rate target in the next few months.
Brisbane and Adelaide tenants are experiencing the sharpest rent increases.(CoreLogic)
Since May, the RBA has lifted its cash rate target from 0.1 to 1.35 per cent.
If the central bank delivers another double-sized rate hike on Tuesday (0.5 percentage points), as widely expected, that would bring the new cash rate up to 1.85 per cent.
Buyers’ market and surging rents
“The market has moved to being very much more in favor of buyers over sellers now, especially in markets like Sydney and Melbourne,” Mr Lawless said.
“Buyers are getting back in the driver’s seat. They have more choice, and there’s less urgency.
“But for sellers, it means they need to be much more realistic about their pricing expectations, and they should expect there’s going to be more negotiation.”
Renters are also disadvantaged in the current property market. As their landlords’ mortgage repayments increase (and more foreign workers and students) return to Australia, rents have surged rapidly.
“Rental markets are extremely tight, with vacancy rates around 1 per cent or lower across many parts of Australia,” Mr Lawless added.
“If you consider the history of rents, it’s very rare to see dwelling rents rising at more than say 3 – 4 per cent per annum.”
But in the past quarter, the national average rent jumped 2.8 per cent — and they are up nearly 10 per cent in the past year.
Looking forward, Mr Lawless said renters may be under increasing pressure to rent out any spare bedrooms to more flatmates, look for cheaper rents in apartments (rather than houses), or “stay at home with mum and dad longer.”
“There’s definitely going to be some negative social outcomes from such high rents, which aren’t showing any signs of slowing down at the moment.”
