Was the RBA’s Cup Day dampening rate rise justified?

For the first time since June the RBA moved to increase the cash rate by 25 basis points to 4.35 per cent, reigniting fears the end of the cycle is far from here. Announcing the board’s decision, Ms Bullock cited recent Consumer Price Index (CPI) data from the Australian Bureau of Statistics (ABS) which indicated inflation’s decline slowed down in the September quarter.

Acknowledging as much, Ms Bullock, now in her third month of her tenure and delivering the first rate call that stood solely on her shoulders, explained: “Inflation in Australia has passed its peak but is still too high and is proving more persistent than expected a few months ago.”

While she admitted the “central forecast is for CPI inflation to continue to decline”, Ms Bullock warned “progress looks to be slower than earlier expected”. The board judged a November rate hike as “warranted to be more assured that inflation would return to target in a reasonable time frame”.

Despite Ms Bullock’s justification for an additional rate rise, the 13th since this cycle began early last year, Hayden Groves, president of the Real Estate Institute of Australia (REIA), said the decision was bad news for Australians from all walks of life.

“This [rate rise] is particularly bad news for rental affordability, as investors will once again reassess their capacity to hang onto a rented property,” he shared. “It’s also bad news for any Australians who hold a loan or their own home.”

The RBA’s November cash rate decision will compound the financial woes of Australian borrowers, particularly given the delayed impacts of previous cash rate hikes are yet to be fully felt across the country.

Tim Lawless, CoreLogic research director, believes a combination of the RBA’s latest cash rate increase mixed with persistent cost-of-living pressures and a turbulent geopolitical environment, underpinned by the Israel-Gaza war, is “likely to weigh on consumer sentiment, which is already in deeply pessimistic territory”.

He noted this weakened consumer sentiment could “act as a drag on Australia’s housing market activity”, which has surged this spring. According to the research firm, home values have rebounded tremendously while auction activity hit a multiyear high at the beginning of the month.

“A rebalancing between buyer demand and advertised stock levels is likely to take some heat out of the housing upswing, which has already been losing some momentum, at last at a macro level,” he said.

“While growth in housing values is likely to slow further, it’s hard to see prices going backwards over the near term,” he added, with supply shortages, rising migration and record low vacancy rates likely to keep upward pressure on Australian home values.

Even with consistent rate increases, Real Estate Institute of Queensland chief operating officer, Dean Milton, explained: “There has been no material uptick in distressed loans, and most mortgagees have managed to grin and bear it.”

“This is a positive indication that existing mortgage holders have shown preparedness and a level of resilience to rising rates,” he noted.

However, much like Mr Lawless, he warned the current rate hiking cycle could impact the medium to long term housing outlook with “first home buyers dropping off and building approvals collapsing”.

“This means the dream of home ownership may be slipping further out of reach with every cash rate rise, and new housing supply is struggling to get off the ground.”

Recent reports support this claim that the great Australian dream of home ownership is becoming a nightmare, with prospective first home buyers straining and sacrificing to pinch pennies for their deposit. Research from Helia Insurance found 90 per cent of first home buyers found the process stressful, while over one-third are working overtime in order to increase their income.

Given this, and dwindling rates of home approvals and new dwelling constructions, Mr Milton believes the current economic climate “does no favours for helping bolster our home ownership rates and helping bridge the gap between the sheer demand for housing and the shortage of supply”.

“Both things would go a long way towards easing the housing crisis,” he added.

Was there cause for a November rate rise?

“Today’s rate rise is unnecessary and will cause further contraction in new home building, constraining the supply of new homes,” declared Tim Reardon, HIA’s chief economist.

In his eyes, strong migration, which has positively impacted the national economy and housing market, may be doing more harm than good with relation to interest rate increases.

“Strong migration is also obscuring the adverse impact of rising interest rates on key economic data, such as gross domestic product, retail expenditure and house prices,” he said.

“Stable and reliable migration has been a cornerstone of Australia’s economic growth. This has been disrupted by two years without migration and then two years of catch up. This disruption to migration is now distorting the RBA’s decision-making,” he explained.

He stressed the Reserve Bank of Australia pulled the trigger too early in its November board meeting.

“The RBA should have waited for the full impact of their decisions to date to emerge in 2024 before adjusting rates again,” Mr Reardon insisted.

Mr Reardon is not the only industry figure who holds an opinion along this line of thinking, with Mr Groves detailing: “The reality is that it is a series of supply side events that contributed to the September quarter [CPI] result, not household spending and other demand side factors.”

“These supply side factors cannot be fixed with another rate rise, which the RBA is well aware of,” he added.

Away from the economic impacts of the board’s decision, Peter White, managing director of the Finance Brokers Association of Australia (FBAA), revealed there has been a “huge spike in people seeking psychological help and other counselling specifically due to interest rate rises”.

Feeling the major financial and emotional burden of the central bank’s cash rate hikes is a cohort of younger Australians, according to Mr Milton.

“Spending is being driven by 55+ Australians who are a cohort that is largely mortgage free and less likely to be negatively impacted by increases to interest rates – on the contrary, their savings are boosted by it,” he explained.

“Inflation is also linked to the large increases in electricity, government infrastructure spend and fuel prices, which are not influenced by interest rate movements,” he added.

Moving into 2024, Mr Groves believes the reforms of the RBA’s structure, which include reducing the number of yearly meetings to eight, will “provide much-needed time to thoroughly analyse and consider the data, ultimately benefiting all Australians”.

Regardless of the future trajectory of inflation and the RBA’s cash rate responses, Mr White stressed the importance of the central bank to “consider the human cost” of its decisions.