Cash rate upswing likely to have “minor” impact

The rapid increase in the cash rate over the past few months and the likelihood of further hikes is likely to only have a minor impact on several aspects of the property market.

Housing Industry Association (HIA) chief economist Tim Reardon said several buffers in place are likely to cushion the impacts of the cash rate increases.

“The fastest increase in the cash rate in almost 30 years will bring Australia’s home building boom to an end, but there is a significant buffer of building work to be completed,” he said.

“The increase in interest rates to date has caused uncertainty for households, but it is well within their capacity to absorb.”

Mr Reardon said the confidence among households would be restored quickly once the cash rate stabilises next year.

“The uncertainty around how far the RBA needs to increase interest rates to restore inflation back to its target range has impaired consumer confidence,” he said.

A forecast from Westpac indicates the RBA would cease the hikes when the cash rate hits 2.6%, which is in line with the central bank’s guideline.

Currently, the cash rate sits at 1.85%, after four consecutive months of hikes.

A separate report from CBA showed that these rapid rate hikes could potentially lead to the RBA cutting rates by the second half of 2023.

The uncertainty in cash rate would likely be of concern in terms of the demand for new homes, which has weakened since the first increase in May.

“The cost of building a new home has increased significantly over the past two years and was starting to limit demand for new homes — rising interest rates will accelerate this slowdown,” Mr Reardon said.

However, it appears the harsh conditions for builders are starting to ease. Still, the acute shortage of land could potentially be a major constraint over the next year.

“Despite the uncertainty around the cash rate, demand for new homes – especially multi-units – will be supported by low unemployment, booming export markets, an acute shortage of rental homes and a return of overseas migrants, students and tourists,” Mr Reardon said.

Resource: yourmortgage.com.au