Why interest rates may not rise as high as expected

Economists have predicted the rising cash rate could peak over 3.0%, but there’s one factor that may slow interest rate hikes according to CommBank: the acceleration of property price falls.

Home loan interest rates are on the rise following hikes to the Reserve Bank of Australia’s (RBA) cash rate for the first time in over a decade. Since May 2022, the cash rate has been hiked by 125 basis points, which has already had a considerable impact on homeowners’ mortgage repayments.

But it’s not just your repayments that have been affected by rate hikes, but the value of home prices and the housing market.

CommBank’s latest Economic Insights Global Economic and Markets for June, suggests that the RBA likely has “concerns” that may limit cash rate hikes if dwelling prices decrease too rapidly.

Housing prices and the cash rate

CoreLogic’s latest national Home Value Index recorded a second month of falling values in June, down 0.6%. This data also shows that for June, dwelling prices in the two biggest housing markets, with Sydney dwelling prices falling by 1.6% and by 1.1% in Melbourne.

Price growth has cooled across regional Australia as well, with the CoreLogic regional benchmark index rising by only 0.1% in June.

CommBank Head of Australian Economics, Gareth Aird, said: “Based on our forecast profile for the cash rate we expect home price falls nationally of around 15% over the next eighteen months,” said Mr Aird.

“The RBA does not target home prices. But the housing market and the broader economy cannot be separated.”

“We expect the RBA to be cognisant of the nexus between changes in interest rates and the impact on home prices, household behaviour and consumer spending and the broader economy,” he said.

“But if the RBA takes rates too high and too quickly relative to our forecast profile, we would expect bigger falls in home prices. Larger falls in dwelling prices would have a negative impact on the real economy,” said Mr Aird.

Of the big four banks, CommBank has a forecast with the shortest timeline to cash rate peak at 2.60% by November 2023. While it has been tipped that dwelling prices will fall by around 15% by end-2023, they anticipate prices will stabilise again in late 2023.

The latest Big four bank’s cash rate forecasts

• CBA: 2.60% by November 2023
• Westpac: 2.60% by February 2023
• NAB: 2.60% by February 2023
• ANZ: 3.10% by February 2024

The impact of hikes on your mortgage is bigger

The latest cash rate hikes are the first many homeowners will have ever experienced. The last time the RBA hiked the cash rate was in November 2010, when the average loan size was considerably smaller than it is today.

What this means is that we don’t need interest rates to go as high to have a massive impact on the spending habits of homeowners. The impact of an increase to your home loan today will have a considerably bigger impact on your repayments due to the average size of mortgages.

According to ABS Lending Indicators for May, the average home loan size in May 2012 was $354,772 and in May 2022 it was $615,310.

If we apply the same lending conditions and rates from 2022 to the average sized home loan from 2012, and additionally applied the same rate increases, the average mortgage owner would be paying $271 more, assuming a new borrower takes out a 30-year loan at the end of May 2022 vs May 2012, after factoring a 25 bps hike to their rate in early May.

Source: RateCity.com.au, RBA.gov.au

Note: Based on a hypothetical example comparing the impact of rate hikes on average home loan size today versus the average home loan size in 2012. Does not factor in interest rates in 2012. Based on the same lending condition and rates in 2022 as an example to show how loan size affects repayments. Does not factor in fees.

The Reserve Bank will no doubt be taking into consideration falling dwelling values as well as the current size of home loans when determining how to move the cash rate over the next few months.

If you’re concerned with the impact of rising rates on your home loan repayments, it may be worth comparing your options and even considering refinancing. Switching to a lower rate loan is one way you can give yourself a rate cut without waiting for the RBA to stop cash rate hikes.

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