Key facts
- Australia's housing market is facing a potential downturn, with national prices down nearly 4% from their peaks.
- The Reserve Bank of Australia is expected to raise interest rates for a fourth time next Tuesday to 4.6%.
- Economists predict a peak-to-trough fall of 10% for housing prices in this cycle, the biggest in three decades.
- HSBC forecasts a 13% fall in housing prices if rates rise twice more.
- RBA Assistant Governor Sarah Hunter stated house prices would need to fall by 10% on a sustained basis to substantially impact household spending.
- Markets are fully pricing a further rate rise to 4.85%, with a 70% chance of rates reaching 5.1%.
Australia's housing market is facing a potentially severe downturn as the Reserve Bank of Australia (RBA) prepares to raise interest rates for the fourth time, a stark contrast to previous cycles where rate cuts historically supported property prices. Economists and market participants widely expect the RBA to lift its cash rate to 4.6% next Tuesday, a 15-year high, as inflation remains stubbornly high.
Unlike past downturns where falling house prices prompted rate cuts, the RBA now faces a complex inflation outlook influenced by global factors such as an overseas war, a boom in data center investment, and elevated government spending. RBA Governor Michele Bullock noted that supply-side shocks are difficult for monetary policy to manage, suggesting that inflation will persist longer than usual.
While national house prices have already fallen nearly 4% from their peaks, compounded by a government tax change affecting investor lending, this may not be enough to deter the RBA. More economists predict a 10% peak-to-trough fall in housing prices, the largest in three decades, with HSBC forecasting a 13% decline if rates increase twice more. However, RBA Assistant Governor Sarah Hunter indicated that house prices would need to decline by 10% on a sustained basis to significantly impact household spending.
Markets are pricing in further rate hikes, with traders fully expecting a rise to 4.85% and a 70% chance of rates reaching 5.1%. The RBA has previously cited the US-Israeli war and the data center boom as key inflation risks. Macro strategists suggest that factors driving current economic activity, such as the data center boom, fiscal spending, and immigration, are less sensitive to interest rates compared to the pre-pandemic era, leaving the housing market to absorb broader economic imbalances.