Earlier, bigger rate rise could trigger sharper house price falls

“It increases the potential severity of the falls that we’ll see in the second half of this year going into early 2023. I haven’t changed my property market forecasts of a 10 per cent to 15 per cent drop top to bottom, but it’s quite possible that the bulk of the price falls will be felt at the outset.”

Financial markets have been expecting the RBA to lift the cash rate initially by 0.1 per cent.

An earlier and more aggressive move by the RBA could see buyer demand falling well behind supply, said Nicola Powell, Domain’s chief of research and economics.

“We’ve already seen a build-up of stock, particularly in Sydney, which will continue as more sellers list their homes to pre-empt the interest rate rises,” she said.

“But buyers are now becoming cautious and mindful of mortgage affordability and they don’t want to overpay because the market is slowing down, so this weaker demand and heightened supply will drag prices lower.”

CoreLogic research director Tim Lawless said the prospect of higher interest rates was already weighing on consumer sentiment.

“It’s reasonable to argue that when the cash rate does eventually lift, it will have some further downside consequences for consumer sentiment,” he said.

“There is a close relationship between consumer sentiment and housing market activity. When consumers are confident, we generally see above average levels of real estate purchasing activity, and when sentiment is low, it is the opposite.

“Considering that purchasing real estate is such a high decision, it’s not surprising commitment that households would want to be confident about their household finances and employment outlook before committing to purchasing a home.”

Sydney-based buyer’s agent Jack Henderson, of Henderson Advocacy, said the number of active buyers had already dropped significantly in the past few months.

“The buyer pool is probably about a third of what it was six months ago,” he said. “We used to see at least eight serious buyers for every property, now there’s one or two, so we’re seeing many price reductions as vendors become more willing to negotiate.”

Dr Oliver said that while there would be an initial shock to mortgage holders, he was not expecting a large increase in defaults that could crash the housing market.

“I don’t see a crash in house prices, just a pull back because a lot of households are ahead on their mortgage repayments,” he said.

“The banks have also been stress-testing borrowers on the higher assessment rates to ensure they can service their home loans. So a rate rise even by over 2 per cent is unlikely to cause a major rise in delinquencies.”

Peter Esho, co-founder at buyer’s agency Wealthi, said rising rents would counteract the negative impact of a rate rise on investors.

“Rate rises are usually followed by rising rents, which we’re already seeing in many markets,” he said. “So I think owner occupiers will be worst hit, particularly in locations like western Sydney.“

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