Australian homeowners could be hit with another interest rate rise next week, with financial markets now pricing around a 95% chance that the Reserve Bank will increase the cash rate at its September 29 meeting. Australia’s four major banks are also forecasting a 0.25 percentage point increase, which would take the cash rate from 4.35% to 4.60%.
It would be the fourth increase this year and would mean the cash rate has climbed a full percentage point from 3.60% at the beginning of the current tightening cycle. At 4.60%, Australian interest rates would be returning to territory not seen since around the Global Financial Crisis.
The problem for households is that these increases are arriving just as Australia’s property market is beginning to weaken. The total value of Australian residential property fell by $34.1 billion during the June quarter, according to the ABS, while more recent figures show national property prices continuing to decline.
AMP chief economist Shane Oliver believes there could be considerably further to go. He expects national property prices to fall around 10% from their peak and has estimated that as much as $1 trillion could eventually be wiped from the value of Australian residential property if the downturn continues.
That matters beyond homeowners watching the estimated value of their property decline. Higher mortgage repayments reduce the amount households have available for everything else, while falling property prices can also make consumers feel less wealthy and therefore less willing to spend. Together, those forces can place considerable pressure on retail spending, construction, investment and eventually employment.
Yet the RBA remains focused on inflation. Governor Michele Bullock said this week that some of the inflation risks the Bank has been concerned about appear to be materialising, particularly persistent energy costs and continued excess demand within the Australian economy. The RBA has not committed to another increase, but the market is increasingly preparing for one.
Against that backdrop, gold has been remarkably steady. Australian-dollar gold is currently sitting around A$6,100 an ounce, having spent much of September trading around the A$6,000 to A$6,200 range.
That creates an interesting contrast. Australian housing is being squeezed by higher borrowing costs, while gold does not rely on cheap credit or household borrowing to support its value. Gold has certainly experienced its own correction this year, but its recent stability around A$6,100 comes at a time when one of Australia’s largest stores of household wealth, residential property, is facing increasing pressure.
With another RBA decision only days away, the next few weeks should provide a clearer picture of whether Australia’s housing downturn is simply a correction after several strong years, or whether higher rates are beginning to create a much broader economic slowdown.
Most Australians purchase property using debt, which makes housing particularly sensitive to interest rates. When rates rise, the same household income can service a smaller mortgage, reducing how much buyers can afford to pay.
Higher repayments also remove money from household budgets. That can weaken demand across the economy and reduce confidence, particularly when property prices are falling at the same time.
Gold works differently. It does not generate an income and its price can move considerably, but owning physical gold does not require a mortgage or depend directly on the availability of cheap credit. This is one reason gold and highly leveraged assets such as property can behave very differently during periods of rising interest rates.
Disclosure: This article is provided for general information and educational purposes only and does not constitute financial advice. Markets can move quickly and past performance is not a reliable indicator of future results. Always conduct your own research and consider your personal circumstances before making investment decisions.
