Industry reacts to latest cash rate call

RBA governor Philip Lowe alluded to a continued increase in the cash rate, which rose 25 basis points (bps) to 3.60 per cent on Tuesday, 7 March, stating that “the board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary.”

This position comes despite the RBA recognising that “monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage repayments.”

However, the position of many industry heavyweights is that the latest cash rate increase places the national economy at risk.

Hayden Groves, Real Estate Institute of Australia (REIA) president, believes that “the latest interest rate rise could push the economy into recession, and not one ‘we had to have’.”

He noted how a $600,000 mortgage experienced a $1,100 repayment increase since the cash rate increase began, adding “affordability is set to worsen,” in light of the RBA’s position to continue the tightening cycle. 

Building on this, Tim Reardon, chief economist at the Housing Industry Association (HIA), detailed that the central bank’s rate hikes risk an unnecessary slowdown and “inflict further unnecessary pain on the $120 billion housing sector and related industries.” 

Citing leading housing indicators falling to “their lowest level in 15 years,” he explained that this trend will continue, compounding the decline in building activity. 

“Loans for the purchase and construction of a new home fell in January to the weakest month since November 2008,” he said. “This is before the full impact of rate increases in 2022 hits the market, let alone the February 2023 increase.”

“There are significant lags evident in this cycle and the full impact of higher cash rates will not be fully reflected in economic indicators until the second half of the year, at the earliest.”

Mr Reardon said the higher cash rate is “compounding the adverse impact of the rising cost of materials, labour, and land, as well as the increased costs of compliances.”

He explained the current large pipeline of work, set for completion throughout the year, is “obscuring the adverse impact of rate rises on other indicators such as unemployment and economic growth.”

The RBA’s latest decision has implored Real Estate Institute of Queensland’s (REIQ) chief executive officer, Antonia Mercorella, to call for a broader approach to fighting inflation. 

Outlining that the 10 consecutive increases have had “little impact to inflation,” she wondered when the “RBA might stop and think whether this approach is still the right course of action.”

“Energy costs, lack of new land supply, and natural disaster impacts are all large contributors to inflation,” she said. Adding that “interest rate increases do nothing to address the cost-of-living crisis that these factors are driving.” 

Declaring that “it cannot be left to mortgage holders to do all the heavy lifting to fix our economic woes,” she implored “all levels of government to address the productivity constraints on the economy.”

Ms Mercorella explained, “New roads, dams, increased land supply, and natural disaster proofing key infrastructure all need to be addressed urgently.” 

She noted the RBA, which has “justifiably provoked the ire of the community” with its consistent rate hikes, is only acting “within the constrained limits of its charter and its objectives.”

However, she acknowledged these actions have caused pain to a majority of mortgage holders, especially the 80 per cent locked into variable loans, who feel a “direct impact” of the cash rate increases.

Research from CoreLogic found Australia’s swiftest and largest rate hike cycle in history has increased monthly mortgage repayments on a $500,000 home loan by four figures since May.

Tim Lawless, the firm’s research director, explained, “More households are likely to be facing balance sheets that have become thinly stretched” due to the 350-bp cash rate increase, 50 bps above the serviceability buffer actioned since October 2021. 

Noting that “90-plus day mortgage arrears were around record lows at the end of last year,” he tendered it would be “naive to expect mortgage delinquencies to remain at such low levels.”

He added, “A trend towards improved underwriting standards, including lower proportions of high debt-to-income ratio lending and high loan-to-value ratio lending since early 2022, should help to keep mortgage defaults relatively low.” 

Expectations of a continued tight labour market are “another factor that should also help to keep a lid on mortgage defaults,” according to Mr Lawless, though he noted the current 5 per cent unemployment rate forecast by the RBA and Treasury will be threatened by higher interest rates. 

“Arguably, the full extent of the aggressive rate hiking cycle is yet to flow through to households,” he said.

“Variable mortgage rate adjustments take some time to impact existing borrowers, and there is also a larger than normal portion of mortgage on fixed terms that have been insulated from rate hikes to date,” Mr Lawless concluded.