‘More harm than good’: Why RBA will keep raising interest rates despite falling house prices

House prices may be falling – but apparently, that won’t stop the RBA from aggressively jacking up the cash rate as households suffer.

Aussie house prices are tanking, with experts predicting a significant crash on the horizon – but that won’t stop the Reserve Bank from aggressively lifting rates for months to come.

Earlier this month, international banking giant Goldman Sachs issued a terrifying prediction for the local property market, warning that as fears of a global recession spread, Australia was particularly at risk.

In fact, the bank claimed in a recent report that Australian properties will plunge by a whopping 18 per cent after the bubble bursts – a far larger crash than what is predicted for other nations.

So far, the data is backing up that prediction, with Westpac warning in late August that prices could fall by around 18 per cent in Sydney and Melbourne by the end of 2023.

It was echoed by ANZ, which claimed capital city prices were tipped to drop by 18 per cent by the end of next year before climbing by 5 per cent in late 2024.

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House prices are set to plunge. Picture: Gaye Gerard

And according to PropTrack’s latest Home Price Index released at the beginning of this month, Australian house prices have fallen by 2.7 per cent nationally since their peak last year and any rises from early 2022 have all but disappeared.

But while prices are falling, and households are already feeling the pinch from five consecutive interest rate rises coupled with skyrocketing cost of living pressures, experts universally agree the RBA will keep raising the cash rate for months to come.

According to this month’s Finder RBA Cash Rate Survey, most economists and experts agree that the RBA is not done raising the cash rate from its current position of 2.35 per cent as it battles against soaring inflation.

Peter Boehm from Pathfinder Consulting told Finder he believed the cash rate would hit 2.5 per cent by the end of 2022.

“This means the RBA has to keep increasing rates over the next couple of months,” he said. “No current economic or financial data has come to light which would cause the RBA to deviate off its stated path of rate increases to combat inflation – even though such a strategy will probably do more harm than goodwith limited positive impact on bringing prices down.”

Experts believe the RBA – led by Governor Philip Lowe – will keep raising the cash rate despite falling house prices. Picture: Britta Campion/The Australian

Jason Azzopardi from Resimac agreed, stating that future rate rises “aligns with [the] RBA narrative to rein in inflation” and that it was“clear this journey is not finished”.

And Craig Emerson from Emerson Economics had a similarly bleak outlook.

“The RBA appears likely to go too hard too soon necessitating a reverse direction in the first half of 2023,” he said.

Meanwhile, Mathew Tiller from LJ Hooker Group said the RBA would not be bothered by the pain felt within the real estate sector.

“The impact of recent cash rate increases have begun to impact property markets across the country; however, inflation across the rest of the economy remains a concern for the RBA. As such, the RBA will continue to increase the cash rate over the short term,” he said.

‘There are lags’

RBA governor Philip Lowe last week acknowledged it will take time before the full impact of aggressive rate rises are truly experienced.

“We are conscious that there are lags in the operation of monetary policy and that interest rates have increased very quickly,” Dr Lowe said.

“And we recognise that, all else [being] equal, the case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises.”

But he said that wasn’t enough to halt the RBA’s actions.

The property market is already feeling the pinch. Picture: Julian Andrews

“But how high interest rates need to go and how quickly we get there will be guided by the incoming data and the evolving outlook for inflation and the labour market,” he added.

Last month, economist Chris Richardson told news.com.au that younger, less well off Australians would be disproportionately affected by the RBA’s aggressive, earlier-than-expected rate hikes.

Originally published as ‘More harm than good’: Why RBA will keep raising interest rates despite falling house prices