Housing versus interest rate rises: is this a new world of weirdness?

Despite thirteen interest rate rises since May 2022 and some economists tipping more by the Reserve Bank board, things are not happening as they should. Here’s why.

Financial markets will focus on RBA rate rises on Tuesday afternoon. Picture: iStock

It’s been a crazy couple of years for borrowers, investors and economists and it has left many experts scratching their heads.

The Reserve Bank of Australia started slamming the brakes on the economy in May 2022 with the first of 13 interest rate increases, and its relentless rises over 18 months pushed up the cost of loan repayments by 62 per cent.

If you’ve got a $500,000 variable-rate home loan you’re now paying $1300 a month more than two years ago. If you owe $1m on a mortgage, you’re paying $2600 more each month. Business borrowers have battled similar sharp rises.

But things haven’t been happening as they should.

Cash rate rises are the RBA’s crude tool to put the brakes on inflation by slowing consumer spending and reducing demand for goods and services. There are usually common casualties caused by quickfire rate rises, but so far some of them have failed to materialise. Here are three.

Housing prices

RBA rate rises in theory should slow down the housing market as buyers must pay more for their loans and banks lend them less money because of affordability calculations.

However, several capital cities have climbed strongly.

The latest PropTrack figures show dwelling prices are up 7.2 per cent in the past 12 months for state capitals, led by Perth (up 20.6 per cent), Adelaide (14.5 per cent) and Brisbane (13.7 per cent).

Only Hobart home values have dropped, down 1.9 per cent in the past year, while Sydney is up 7 per cent, Darwin is 1.4 per cent higher, the ACT added 1.3 per cent and Melbourne rose 0.9 per cent.

High interest rates have hurt many, but some economic impacts are unusual. Picture: iStock

Home prices could get another leg up from tax cuts for every worker coming from July 1.

Reasons for the property price strength include strong population growth – up by one million people in two years – and tight rental markets prompting more people to pay whatever it takes to get a foot in the door.

Unemployment

Higher interest rates have hurt consumer sentiment, squashed spending by many and caused a spike in business collapses.

However, this has not translated into higher jobless numbers. Last week’s Labour Force figures from the Australian Bureau of Statistics show unemployment currently at 4 per cent.

Before the first RBA rate rises in May 2022 it was 3.8 per cent, so overall there’s been little movement.

This weirdness may be a reflection of employers holding onto staff more, remembering the crippling worker shortages suffered coming out of the pandemic.

Investment returns

It’s not just property investors who have enjoyed good returns. Share markets in Australia and overseas have been strong despite businesses and homeowners suffering a big hit to their borrowing costs and spending power.

Australia’s share market is up 6.3 per cent plus dividends in the past 12 months, while the US market has surged almost 25 per cent despite even higher official interest rates there.

We can thank AI and other tech giants for this, as investors pour into the world’s biggest companies such as Microsoft, Nvidia and Google, with flow-on effects for markets everywhere.

These weird and wacky responses to big rate rises may be because they followed an even weirder period, when the pandemic caused long lockdowns, big jumps in household savings as people couldn’t spend their cash, and caused havoc in global supply chains.

As central banks overseas begin dropping their interest rates well ahead of the RBA, perhaps things will return to some form of financial normality.

Or maybe weird is the new normal?

Originally published as Housing versus interest rate rises: is this a new world of weirdness?