Handling RBA rate talk: are interest rate increases something to worry about?

It’s easy to get caught up in the moment. Rate hikes from the Reserve Bank of Australia have dominated home loan news for the last year, with much of the chatter hingeing on how this will impact variable interest home loans – and by extension, mortgage repayments. 

But while many Australians have good reason to be concerned about their mortgages, let’s keep things in perspective. Housing market fluctuations happen all the time, and the RBA isn't done raising rates yet. 

So while we may be in an uncertain moment, zooming out on the Australian property market will tell us how to handle the rate hike news – and plan for the future.

Honing in on a specific week in the housing market is like mistaking a single puzzle piece for the bigger picture. Cash rate hikes, as far as a tool of monetary policy goes, are quite a slow lever to stop inflation. It takes quite a few successive rounds of rate hikes to ripple across variable interest rates, from home loans to savings accounts, let alone cool down the economy.

In fact, we may only be just now experiencing the full effects from the rate hikes in 2022.

These effects can include:

• Higher variable interest rates for home loans, savings accounts, and term deposits.
  
• Costlier home loan repayments, especially for variable home loans.
  
• Higher insurance premiums on mortgage protection policies.
  
• Lower property prices, since expensive home loans put off many potential buyers and drag down property values.
  
• Diminished home equity, which often follows property value drops. This can also make unlucky buyers prisoners of their own mortgage, as they don't have enough equity built up to safely refinance.
  
• Constrained housing affordability, since higher interest loans price many Australians out of home-ownership while putting others under mortgage stress.
  
• A rising cost of living, since housing costs contribute significantly to the Consumer Price Index (CPI).
  
• Increased risk of a recession, since if the RBA overdoes it in their gamble to stop inflation, they must stop the economy too much. 

Variable rate home loan trends in Australia:

Those hoping to avoid the variable rate hike by fixing their home loans may find themselves disappointed, since fixed rates have largely had rate expectations priced into them as this point.

Fixed rate home loan trends in Australia:

Downturns are nothing new to the property market. Besides, there’s much more to consider besides rising interest rates when reading the housing crystal ball. If you look over the last thirty years of housing trends (the common life of a home loan), you’ll notice a few perspective-changing things. 

Firstly, housing prices will inevitably go up over time. Australian housing values have increased by nearly 415% since 1991, although they did experience their fastest rate of growth during the 2021 housing boom. So despite COVID, the GFC, and countless other global conflicts over that same time period, housing prices still escalated. For those looking ahead, this is critical to keep in mind.

Secondly, every boom is followed by a bust. Socioeconomic conditions create an ebb and flow in everything from property value to where popular demand lives. Higher demand will push up prices, then demand drops after the prices get too high, and so forth.

It can be both a comfort and an inconvenience to know things will never stay the same, but this also encourages caution to those leaping into a red-hot market. Your equity may diminish when prices fall, or you may have to budget for a hefty capital gains tax.

Even coastal erosion has jeopardised nearly $25 billion worth of beachfront property, which was one of the most popular areas to buy in the 2021 property boom.

Thirdly, the cost of housing finance greatly impacts the property market. Raising the cash rate escalates interest rates on home loans, which knocks on to how much buyers are willing to bid on the house of their dreams. Struggling sellers will have to compromise, thus lowering the final price. 

Inflation, the primary target of the RBA's rate hikes, clocked in at an eye-watering 7.8% over 2022, which means the market will require more intervention until conditions normalise. While property prices still haven't dropped below their pre-boom norms, buyers may have a window as conditions continue to change in 2023. 

While it’s part of the deal that you may save now to pay more later with a variable home loan, it’s important to stress test your mortgage because rates will always change. Budgeting for inevitable shifts instead of panicking about what’s happening now will put you in better stead with your mortgage repayments long-term, and may be key to breaking – and staying – in.

Keep a finger on the housing market’s pulse with our home loan interest rate comparison tool, or stay on top of rate increase news with our RBA rate tracker. 

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