Is an interest rate hike necessary to control Australia’s property boom?

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  • Australia’s property price surge continued into 2022 after a remarkable jump in housing prices last year.
  • Demand and supply have become more evenly balanced in capital cities, such as Sydney and Melbourne.
  • Experts are hopeful that house prices might take a breather following monetary policy contraction.

The Australian property prices have been going haywire for about one and a half years now, with policymakers embracing different measures to control house price inflation. The methods adopted to prevent the house price boom have not been able to yield fruitful results so far, with the property price surge continuing in 2022.

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As per CoreLogic statistics, Australia’s January property price growth surprised to the upside as growth rates stabilised in Sydney and Melbourne. The property consultant’s national measure of housing values surged by 1.1% in January, with five of the eight capital cities recording a modest rise in the monthly rate of growth.

Last month, the annual change in national housing values touched a new cyclical high, with Australian dwellings inching up 22.4% over the year. This represents the highest annual rate of growth since June 1989. The highest annual growth rate was seen in Brisbane across the capital cities, where housing values rose by 29.2%.

It is worth highlighting that inventory levels have normalised in Sydney and Melbourne over recent months. This has taken some urgency out of the market as demand and supply become more evenly balanced. However, in areas like Brisbane, supply has continued to remain tight, with buyer competition putting upward pressure on price levels.

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What to expect from interest rates?

Notably, the property prices upswing journey has coincided with the record-low interest rates prevailing in the economy, which have been encouraging homebuyers to embrace mortgage lending. Currently, the cash rate stands at 0.10% in Australia since November 2020.

However, things might change over the coming months. Economic activity is bouncing back strongly in Australia, supported by a revival in investment and consumption following the easing of lockdown restrictions. Meanwhile, headline inflation increased by 3.5% over the year to December 2021 quarter, reflecting a stronger than expected rise in consumer prices.

At a time when the economic recovery is taking centre stage and inflation is moving out of control, speculations of interest rate hike are rife in the market. Experts are hopeful that house prices might take a breather following monetary policy contraction.

The central bank has recently ceased its bond-buying program, urging experts to believe that an interest rate hike might be on the way. Experts are certain that a cash rate spike can reverse the push given to borrowing demand via record-low interest rates. However, the Reserve Bank of Australia (RBA) has re-iterated its hesitance to raise the cash rate in the near future.

As per the central bank, the decision to end the bond purchase program does not indicate that a rise in the cash rate is imminent. The bank continues to hold the stance that the cash rate will not be increased until inflation is sustainably within the 2 to 3 per cent range. Given the recent inflation data, the central bank believes it is too early to conclude that inflation is sustainably in the target range.

As per the RBA, the recent surge in inflation has come on the back of very substantial disruptions in supply chains and distribution networks, which are expected to be resolved in the months ahead.

Related Read: Is an interest rate hike on the way in Australia?

Will cash rate hike be effective?

Interestingly, the possible efficiency of a rate hike has improved amidst increasing housing supply, which has eased some demand-side pressure from the property market. Australia is observing rising construction and dwelling approvals, along with additional housing capacity, which has bolstered supply-side dynamics.

Experts believe that a contractionary monetary policy stance by the central bank can facilitate a smooth reversal of property prices. Meanwhile, the gradual path of monetary policy tightening is expected to reduce the gap between an interest rate hike and declining borrowing capacity.

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While an interest rate hike may be the perfect solution to the existing property market boom, the central bank is unlikely to announce a rate hike unless it meets its wages growth target. A potential rise in wages is most likely to be welcome news for the property market, allowing greater affordability to seep in.

However, one cannot neglect that a sharp or back-to-back increase in interest rates may prompt an abrupt fall in prices, creating a crash-like scenario. Thus, it seems imperative for the central bank to proceed with caution.

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