Bank warns too many interest rate rises could ‘crash’ Aussie housing market

As Aussies brace themselves to be slugged with multiple interest rate rises, one expert has warned the hikes could have a chilling impact on the property market.

There are warnings that Australia’s housing market could “crash” if interest rates rise too high after super-sized increases in the past two months.

The Reserve Bank of Australia (RBA) has hiked interest rates three times since May, taking it from a record low of 0.1 per cent to a staggering 1.35 per cent.

The Swiss investment bank UBS has predicted interest rates will peak at around 3.5 per cent in March next year, but said this will still hit the housing market hard.

“We still think market pricing of about 3.5 per cent – if delivered – would likely crash housing, and see the economy nearing a recession,” George Tharenou, chief economist at UBS, told The Australian.

If interest rates were to rise to 3.5 per cent it would likely see the average variable mortgage rate hit a whopping 6 per cent and could plunge the economy into recession, according to the investment bank.

“Interest payments across the economy next year for the household sector will close to double from now,” Mr Tharenou said.

“We have never seen such a sharp increase in repayments. That really crushes household cashflow next year when you have cost-of-living issues.”

Looking to save on your mortgage? Compare Money's tips for a lower interest rate could help >

The housing market could crash if interest rates go too high. Picture: William West/AFP

The average Australian homeowner could pay an extra $991 on their mortgage by the end of the year, if the Reserve Bank of Australia passes on all of its predicted rate rises.

The Australian Prudential Regulation Authority required banks to stress test people applying for new loans by 3 per cent above the current interest rate from November, but rates above 6 per cent would be well above the test for millions who had taken out a mortgage earlier.

Major banks such as Westpac and NAB have predicted interest rates will rise to 2.6 per cent by the end of the year, while Commonwealth Bank has been more conservative, pegging it at 2.1 per cent by the end of 2022.

Meanwhile, ANZ has forecast interest rates to climb to 3.1 per cent by February 2024.

Rates were increased in May for the first time in 11 years in response to spiralling inflation, which hit 5.1 per cent in the March quarter, setting off economic alarm bells.

Experts have explained the need for the rate rises in more detail since then, saying the RBA is attempting to allow the economy to recover from the impacts of the Covid-19 pandemic, war in Ukraine, the NSW-Queensland floods and the energy crisis in Australia.

UBS chief economist (Australia) George Tharenou. Picture: Hollie Adams/The Australian

Mr Tharenou said, across the nation, house prices have been falling “quickly” in response to the rising interest rates.

He believes the RBA will be forced to cut interest rates again in the second half of 2023 to avoid Australia falling into recession, particularly as trillions of dollars belonging to millions of Aussies is tied up in the property market.

“The house price outlook is at least 10 per cent down over the next year, but to stop a larger fall will require the RBA to shift their policy direction and start cutting next year,” he said.

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 the effect of the rate rises takes hold.

Sydney and Melbourne would be hardest hit by prices dropping. Picture: NCA NewsWire/David Swift

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

The skyrocketing cost of living, rising interest rates, a blowout in debt and company collapses are going to combine to have a “catastrophic effect” with more Aussies likely to face losing their homes and falling into bankruptcy in coming months, Malcolm Howell, partner at insolvency specialist firm Jirsch Sutherland, has warned.

“If we see the increase in interest rates go up too much further that will put the pinch on a lot of families,” Mr Howell said.

Homeowners have also been warned to brace for a triple whammy of a third 0.5 percentage point increase in the cash rate next month amid looming price hikes for petrol, fruit and vegetables.

Originally published as Bank warns too many interest rate rises could ‘crash’ Aussie housing market