Rates a little bit higher

On November 23 the Reserve Bank met expectations by taking its official cash rate up 0.75% to sit at 4.25%. They also lifted their projection for where the rate will peak from 4.1% to 5.5% which was slightly higher than market expectations which immediately ahead of the rate review were at 5.1%.

The key message from the monetary policy review however came not from the interest rate numbers but the words used by the central bank. They warned about the need to put the economy into recession in order to get inflation under control and how a range of factors were combining to create greater than expected inflation risks.

Specifically, they noted that in spite of falling house prices, rising interest rates, and high consumer pessimism, householders continue to spend. They also noted the stronger than expected rebound in foreign visitor numbers, and the better than expected net migration inflows.

On this basis, should we have deep concerns that interest rates will be pushed a lot higher for home buyers?

That certainly is the message which people have picked up and the early results from my monthly survey of real estate agents shows there is a definite market impact underway. The net proportions of agents reporting that they are seeing more people attending auctions has stepped right back into negative territory. The same goes for attendance at open homes.

More agents now say that they are seeing prices falling in their location, and the country has moved to even more of a buyer’s market than it was already. Both first home buyers and investors have stepped back further from making a purchase.

However, this is where things get interesting. There is new housing market weakness because of the warnings from the Reserve Bank. There will definitely be some sizeable rises in floating mortgage rates because the cost to banks of borrowing money at a floating rat to lend floating is closely aligned with the official cash rate which has another 1.25% to go up.

But with fixed interest rates things are different. Bank fixed rate borrowing costs reflect market expectations for where the official cash rate will go – not where it is at right now. Those expectations were for a 5.1% peak before the Reserve Bank’s November 24 announcements. But just after the mid-October inflation data were released those expectations were for a 5.5% peak and it is when the markets were expecting that peak that banks last raised their fixed mortgage interest rates.

They also reflect expectations that the rate will go down over 2024 and potentially from late in 2023 if the Reserve Bank is true to form and ends up tightening monetary policy by too much.