Are RBA rate hikes actually stopping inflation in the housing market?

Despite 3.75% worth of Reserve Bank rate rises behind us, the housing market seems to have made a remarkable recovery, showing critical signs of life such as lifting auction clearance rates and a rebound in capital values. 

So why are Australians still buying property, despite the high cost of financing a home loan?

The Reserve Bank of Australia (RBA) has been hitting inflation hard with the monetary hammer, driving interest rates to heights unseen since 2012. But while this has added thousands to the costs of mortgages nationwide, property price growth seems to be on the rise again after a lacklustre year. 

But don’t be fooled, warns Mozo banking expert Peter Marshall. This regrowth is not a sustainable one. 

“Rate hikes aren’t so much affecting the kinds of people buying houses at the moment,” explains Marshall. 

“Of course, they will to some extent. If the rate hikes weren’t happening, house prices would be going through the roof already, but the rate hikes are just keeping that a bit slower than it would be otherwise.”

Instead, this current resurgence is driven by an influx of immigration and cashed-up renters ready to leave their old lifestyles behind – two groups of people unlikely to feel the burn of rate hikes.

“Buying a house is a long-term proposition, and the future of rates is probably – for the people who can afford to handle it right now – a relatively minor issue,” says Marshall. 

“I don’t think rates at this level are doing much to change people’s behaviour in the property market.”

Tight housing supply and hot demand from these groups can largely explain the marginal uptick in property growth. As soon as that demand eases, however, the makers of the next property boom – owner-occupiers and first-home buyers – will still have their path into the market obstructed by high interest rates, and that likely will cool things off again. The momentum we’re currently seeing may be short-lived.

Of course, the conundrum for many is, “If property prices grow, would that worsen inflation and cause more RBA rate hikes?” It’s a valid question. Growth in the housing sector could certainly contribute to inflation – which the RBA is desperate to control. 

However, Marshall admits property growth – or indeed, affordability – isn’t on the central bank’s mind when it comes to raising the cash rate. It’s purely a matter of inflation, and inflation isn’t projected to ease until 2024 – for reasons that may not have anything to do with the RBA.

“It’s unclear how much of an impact the RBA’s actions have had on the economy,” says Marshall. “But it’s probably fairly minimal.”

Marshall projects the central bank has one or two more hikes left, with a hold in June in lieu of waiting for winter wage and employment data. This could put the top of the rate cycle at 4.10% or more by the end of winter. 

“It’s possible the RBA will move in July or August – in fact, it’s quite likely that we’ll see another rate rise,” says Marshall. 

“The May rate rise surprised a lot of economists, but I thought the RBA probably did the right thing. Easing off too soon would have sent the wrong message to people.”

Instead, the central bank has made it resoundingly clear the message is to reel in spending, park your cash in a savings account, and watch your mortgage repayments. Whether or not home buyers hear it is another matter. 

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