What does the latest RBA cash rate rise means for property prices, inflation and the risk of tipping into a recession? RMIT expert available for comment. – RMIT
An expert from RMIT is available to comment on the latest RBA cash rate rise and what it will mean for Australia’s housing market and the economy more broadly.
Dr Woon Weng Wong, Lecturer, School of Property Construction and Project Management, RMIT University
woon-weng.wong@rmit.edu.au
Topics: Economics, Econometrics, Finance, Property, Quantitative analysis, Statistics
“The rising cash rate will undoubtedly have a negative impact on the residential property market. However, we are only just beginning to see the first signs of a gradual cooling off.
“Looking at our most basic measures like median house prices, the month of June recorded a 0.35% drop from the previous month across all capital cities. Melbourne experienced the greatest decline with a 0.66 percent drop. This is reflected in the auction clearance rates which was 55 percent in the week ending July 4, which is a considerable reduction compared to 74 percent during the same time last year.
“But if we look at the bigger picture, the property market is still running hot with national prices approximately 7.76 percent higher in June compared to the same time last year, with Sydney and Melbourne trailing at 5.41 percent and 3.85 percent respectively.
“And if we go even further back, comparing current prices to the start of the pandemic (circa January 2020), the national median is approximately 35 percent higher with Sydney and Melbourne at 37 percent and 22.5 percent respectively. What this means is that property markets are showing signs of a slowdown but these are relatively minor compared to the substantial gains experienced over the past couple of years.
“Further cash rate rises are expected for the remainder of the year as the RBA aggressively targets inflation, which does not appear to be abating anytime soon with the conflict in Eastern Europe, the energy crisis, labour shortages and recent extreme weather events continuing to wreak havoc on the Australian economy.
“However, the consensus seems to be that further rate rises may be less onerous with the target cash rate anticipated to be 2.1 percent by the year’s end. The current cash rate is 1.35 percent, so that only leaves 0.75 percent on the table over the next 6 months. The cash rate is expected to eventually settle at 2.5 percent by the middle of next year. House prices will likely continue their downward trajectory with modelling by the RBA’s latest financial stability review indicating a 15-20 percent decline over a two-year window based on the assumption of a 200 basis point rate rise.
“The only scenarios in which the RBA might reconsider its hawkish position are inflation being brought under control sooner than anticipated; or a recession develops. The inflation question does not have a simple answer requiring everything from supply chains being fixed to easing consumer demand and a moderating rental market.
“Even if these issues could be resolved, the ongoing conflict in Eastern Europe remains the proverbial elephant in the room. Since the conflict began, crude oil prices (WTI) have risen from approximately USD78 per barrel in January 2022 to its current level of USD110 per barrel. Furthermore, the gas crisis continues to plague Western Europe as the German led exodus scrambles to secure alternative sources in preparation for winter in the northern hemisphere. When and how hostilities will end remains unclear.
“On the recession front, if the situation in Eastern Europe is the proverbial elephant, then a recession is the proverbial whale. The risk of a recession is real but may be avoided so long as economic fundamentals remain strong.
“According to the latest ABS data, the unemployment rate remained at a record low of 3.9 percent in the month of May. This is in stark contrast to the 1991-92 recession ‘we had to have’ in which unemployment rates hovered around 8-10 percent. In a recent UBS panel discussion in Zurich, RBA Governor Phillip Lowe stated there was a “narrow path” for inflation to come down without tipping the economy into recession.”
