Further interest rate increases likely

Ronald ChanSponsored
Finbar Chief Operations Officer Ronald Chan.
Camera IconFinbar Chief Operations Officer Ronald Chan. Credit: The West Australian.

Earlier this year, the Reserve Bank of Australia (RBA) board was relatively sanguine about the need to raise interest rates, with the economy showing resilience and the inflation rate remaining within target levels despite energy costs spiking.

However, in May during the Federal Election campaign, the board’s rhetoric changed, stating it was committed to doing what was necessary to ensure that inflation in Australia returns to target over time.

At the time, it increased the official rate by 25 basis points to 35 basis points.

This month, the RBA increased the official rate by 50 basis points to 85 basis points. The mainstream media responded predictably.

For example, The West Australian reported that the RBA’s surprise move to hike the official cash rate from 0.35 per cent to 0.85 per cent – the biggest one-month increase in more than two decades – would further squeeze households already battling a cost of living crisis.

For those readers who remember the official interest rate being in the high teens, this may have prompted a wry smile.

The RBA is clearly focused on ensuring the inflation rate does not get out of control, with international factors helping push our inflation rate, as well as the strength of the domestic economy.

There can be no doubt that the country has entered a cycle of rising interest rates, which will inevitably impact cost of living and, particularly, the property market.

Although further interest rate increases are likely, it is important to remember they are still much lower than we have generally experienced.

The official interest rate averaged 3.88 per cent from 1990 until 2022, reaching an all-time high of 17.5 per cent in January 1990 and a record low of just 0.1 per cent in November 2020.

I do not believe the modest increase in interest rates will have any immediate significant impact on property prices and demand in Western Australia.

Firstly the fundamental issue we are seeing of a mismatch between high demand and relatively low supply will remain and is not affected by interest rates. If anything, the supply issue may be exacerbated by the higher borrowing rates and cost of debt for developers, which will make commencing major projects for many developers more difficult. The issues with supply and increased cost of materials and labour are fundamental with no quick or easy fix.

There has been some speculation that, with Australian apartments and units relatively undervalued compared to houses, rising interest rates may boost the apartment sector, as higher mortgage costs encourage buyers to accelerate the push into more affordable units.

The WA economy is the strongest in the country and job security is good. The anticipated interstate immigration into WA is commencing and international student numbers have returned.

Bankwest’s data on mortgage repayments shows many homeowners are in a better financial position now compared with pre-pandemic, with 90 per cent of its customers ahead of their home loan repayments.

The majority of WA residents have enjoyed uninterrupted employment during the COVID-19 pandemic, as well as homeowners generally holding much smaller mortgages than their interstate counterparts.

The long period of exceptionally low interest rates, combined with households naturally reducing their costs during the pandemic – with fewer international holidays, less commuting and lower mortgage payments for homeowners – means most families are well positioned to cope with a return to more normal interest rate conditions.

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