Rate rise nightmare: more homes could flood the market as buyers vanish

Australia's property market may see an increase in listings and heightened price pressures if the Reserve Bank of Australia (RBA) decides to raise interest rates again in November. This warning comes amid persistent inflation and an RBA that has not dismissed the possibility of further rate hikes. The housing sector could experience a surge in sellers, a decline in buyers, and additional price challenges as buyer demand continues to wane.

If the RBA raises rates next month, more homeowners may feel compelled to sell in a market that is already showing signs of weakness. There are concerns that an influx of properties for sale will coincide with a further drop in buyer interest. This situation has gained renewed attention as the RBA indicates that inflation remains above acceptable levels and may necessitate additional tightening measures, despite a slowdown in the housing market across several major cities.

Glenn Price, founder of Price Buyers Agents, expressed the urgency of the situation succinctly. “Some owners simply can’t carry the repayments, so they’ll sell, and more stock lands on a market with nobody to buy it,” he stated, capturing the essence of the current dilemma.

The RBA has indicated that inflationary pressures are beginning to resurface. In its most recent policy statement, the board highlighted that geopolitical tensions in the Middle East, rising global energy prices, and domestic capacity constraints are contributing to inflationary trends. Additionally, recent inflation data from Australia has exceeded expectations.

The RBA board concluded that a further tightening of financial conditions is necessary and indicated that it would consider raising rates again if required to prevent inflation from becoming entrenched. This stance was echoed by RBA chief economist Sarah Hunter during a recent interview on 60 Minutes, where she remarked that the battle against inflation is “not quite yet” finished and emphasized that higher interest rates still have significant work to do.

Ms. Hunter noted that the economy is currently facing an external oil shock, while domestic demand is exceeding sustainable supply levels. “We’ve got to make sure inflation doesn’t become embedded,” she cautioned. “We don’t want to live with high inflation for a long time. We want to get it out of the system.”

This creates a challenging scenario for the housing market. An additional rate hike would raise mortgage repayments for borrowers who are already feeling financial pressure, potentially pushing some to sell their properties. Concurrently, it would further limit the borrowing capacity of prospective buyers, reducing the number of individuals able to compete for homes as inventory increases.

Signs of this strain are already becoming evident, with a rise in auction withdrawals and declining clearance rates. Homes are taking longer to sell, and the amount vendors are willing to discount has widened in major urban centers. According to data from Cotality, vendors in capital cities are reducing their asking prices by an average of 4.4 percent to reach acceptable contract prices.

The RBA has acknowledged that property prices have decreased in most capital cities, and there has been a noticeable decline in new housing loans. While Ms. Hunter emphasized that the RBA is not aiming to push the economy into recession and is aware of the difficulties that rate increases are causing for households, she also made it clear that controlling inflation remains a top priority.