This past week saw the 6th consecutive rate rise from the RBA as interest rates continue their race to “normalise” post covid in a desperate bid to stave off inflation. The fact it was “only” 0.25% rather than the anticipated 0.5% rise can be considered a boon, albeit of relatively little comfort to those on variable rates that have seen 2.75% of increases in the past 6 months, or prospective buyers waiting for things to cool but now facing vastly reduced borrowing capacity.
After seeing a hard line stance from the RBA for the past 6 months though, this lesser increase begins to reflect the fact that rates are beginning to come up on a hard limit that won’t just threaten recession, but could have an outsized impact on housing in the middle of a time when we need more housing than ever across the country.
In the early days of COVID when the headline rate was effectively zero and you could secure a loan under 2%, APRA regulations increased the default buffer on borrowing to 3% - i.e. if you were borrowing at 2%, the bank had to assess you as if you were paying 5% in your affordability test. That FOMO buyer that maxed out to get over the line has now seen that buffer taken up, and further rises will only tip them further over the edge. That new buyer - well they are now seeing assessments at 7.5 or 8% rates - and you can imagine what that does for their budget.
Interest rate rises have been the Reserve Bank’s tool of choice to slow down rampant inflation that has been (partially) driven by easy access to cheap cash and subsequent spending - on everything from cars, boats and caravans (if you could find them), to renovations and new homes. Admittedly, they couldn't do much about global supply chains and energy instability amidst war in Europe, but they’ve certainly managed to suck money out of the market in short order - adding hundreds of dollars a month to a home owner’s mortgage bill will do that.
With higher costs of living, and higher mortgage payments (and subsequently rents), the extra spending is quickly coming to an end. There might be more increases to come, but we should be closer to the finish, than the start. Either way, expect rates to remain in headline position for some time to come.