‘Concerns will mount’: Bank reveals one factor that will stop brutal RBA interest rate hikes

Australia’s biggest bank has revealed one major factor that could stop the RBA in its tracks and put an end to brutal interest rate hikes.

House prices are already plunging across the nation – and Australia’s biggest bank claims it could cause major problems for the RBA “behind closed doors”.

Last month, the Commonwealth Bank announced that house prices in Australia’s two biggest cities were set to plummet by an alarming 18 per cent by the end of 2023 as households reel from soaring interest rates.

The bank also forecasts an 11 per cent house price plunge in Sydney this year alone, with Melbourne property prices also set to fall by 10 per cent.

As recently as March, the banking giant was expecting a far more modest fall of 3 per cent in both major cities this year and 9 per cent in 2023, but the Reserve Bank’s aggressive rate rises have sparked a major – and unwelcome – revision.

In May this year, the RBA announced the first official interest rate hike since 2010, lifting the cash rate by 25 basis points to 0.35 per cent.

CBA claims house prices will drop by 18 per cent by 2023 in Sydney and Melbourne. Picture: iStock

Just a month later, the RBA sucker-punched homeowners again with a “super-sized” rate rise of 50 basis points, followed by yet another 50 basis point double whammy this week, with the cash rate now sitting at 1.35 per cent – although it’s all but certain to keep rising sharply for months to come in a bid to curb inflation.

Gareth Aird, head of Australian economics at CBA, said the latest 50 basis point rise suggested the RBA had resolved to front-load the tightening cycle.

As a result, CBA is now expecting a 0.25 per cent rate rise in August, September and November, with the cash rate to hit 2.10 per cent by Christmas.

“There has been a clear shift in tone and stance from the RBA board … Home prices will move lower from here given the RBA is expected to tighten policy via rate hikes quickly,” Mr Aird wrote recently.

“The extent to which prices contract will depend in large part on the speed and magnitude at which the RBA lifts the cash rate.”

One thing that could stop RBA

This month, CBA revealed home price falls had already accelerated in June – and claimed that could be the one thing that stopped the board cold.

“Indeed behind closed doors we believe concerns will mount at the RBA if dwelling prices slide too quickly,” Mr Aird wrote in his July update.

“We believe the speed and size at which home prices correct lower will ultimately act as a limit to how high the RBA will be willing to take the cash rate.”

According to the report, dwelling prices fell by 0.8 per cent across the eight capital cities in June alone – with a drop of 1.6 per cent in Sydney and 1.1 per cent in Melbourne – with annual growth dipping to 8.7 per cent.

If prices fall too far, the RBA might be forced to stop raising rates. Picture: David Swift

Mr Aird said he expected house prices to fall nationally by 15 per cent by the end of next year.

“The expected falls in home prices are significant … there are many homeowners who have bought recently. These buyers will feel the simultaneous negative impact of both rising interest rates and falling home prices,” he wrote.

“Deeply negative real wages growth further exacerbates the downbeat feeling amongst many households as evidenced in recent consumer confidence surveys.

“The RBA does not target home prices. But the housing market and the broader economy cannot be separated.”

He warned that if the RBA takes rates “too high and too quickly”, we can expect to see even bigger falls in home prices.

The RBA runs the risk of raising rates too far, too quickly. Picture: Richard Dobson

Apartment prices need to rise ‘at least 20 per cent’

Meanwhile, billionaire developer Harry Triguboff has claimed that new-build apartment prices would have to rise by at least 20 per cent due to a series of disasters plaguing the construction industry, including soaring costs, labour shortages and natural disasters.

He told The Australian that without price hikes, developers could go under.

“Our costs have gone up, and it’s a bottleneck, everybody wants the goods, and there’s delays everywhere,” Mr Triguboff told the publication.

“Builders already can’t make a profit. If the prices drop a lot, the Government will step in and lower the crazy costs which they impose on builders. The Government cannot allow for housing to drop.”

Originally published as ‘Concerns will mount’: Bank reveals one factor that will stop brutal RBA interest rate hikes