The recent rate increases and the unprecedented upswing in inflation seem to have already dampened Australians’ appetite for property. 

Both CommBank's Household Spending Intentions (HSI) Home Buying Index and Westpac Melbourne Institute Index of Consumer Sentiment both reported declines over the past month.

While CBA’s overall HSI increased marginally over the month, the home buying spending index declined by 3.6% monthly and 8.1% annually in June. 

CBA chief economist Stephen Halmarick said there were monthly and yearly declines in the number of home loan applications and in the volume of Google searches related to home buying over the month.

“The softness in home buying intentions in June is unsurprising given the recent RBA rate hikes and clear signs of a downturn in dwelling prices in Australia,” he said.

The cash rate increased by 50 basis points in July, bringing it to a new high of 1.35%.

“The Home buying index is, therefore, likely to be especially sensitive to higher interest rates in the months ahead,” Mr Halmarick said.

This sensitivity is already reflected in dwelling prices, which, according to CBA’s forecast, would end the year 6% lower and strike a further 8% fall in 2023.

Weak sentiment a clear message about housing

Westpac chief economist Bill Evans said the ‘time to buy a dwelling’ index lifted in July, but remains at a weak level overall, around 39% below the recent peak in November 2020. 

“The monthly gain was due to large increases in Queensland and Western Australia, with homebuyer sentiment still very weak in NSW,” he said. 

Meanwhile, the house price expectations index declined a further 5.6% in July, with sentiments dipping into the negative territory in New South Wales and Victoria. This means that more consumers are expecting prices to decline over the next twelve months. 

Mr Evans said those who own their homes outright are particularly downbeat with their outlook for house prices. 

“Perhaps, these experienced homeowners, who have seen cycles in the past, are more attuned to the damage sharp increases in interest rates can have on housing markets,” he said. 

Rates to increase next month

Mr Evans said the RBA is expected to make another 50bps hike in August, bringing the cash rate to 1.85%, which is near the top of the “neutral zone” of 1.5% to 2.0%. 

“The move will come after a June quarter CPI update, due on July 27, that is expected to show a significant further lift in inflation – we expect annual underlying inflation to come in at 4.5%, up from 3.7%, and annual headline inflation to hit 5.8%, up from 5.1%,” he said. 

Mr Evans said the RBA will continue with its hikes as part of its commitment to contain inflation over the medium term. 

“To deliver on this, and to contain inflation expectations, it will need to continue taking strong actions with policy, pushing the cash rate from a very stimulatory starting point to something well into the neutral zone,” he said. 

However, Mr Evans said the RBA will likely be wary of the “heavy impact” of the back-to-back rate hikes, especially given how fragile consumer confidence is in the current setting. 

“The cash rate has increased at a faster pace than we have seen in any cycle since 1994 and this is clearly unsettling for consumers also facing a sharp rise in the cost of living,” he said. 

“A more cautious approach will be appropriate once policy has moved to ‘neutral’ in August — we advocate and expect the RBA to pause to assess conditions, both domestic and global, prior to moving rates into the contractionary zone later in the cycle,” he said.

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