Rising inflation fuels risk of further RBA rate hikes, deepening Australia housing slump
Australian inflation data showing underlying rates at 3.6% have heightened expectations of another Reserve Bank rate increase, threatening to worsen the country's steepest housing price decline since the late 1980s.
Underlying inflation in Australia rose to 3.6% in the year to September, according to the Australian Bureau of Statistics, up from a revised 3.5% the month before and above the Reserve Bank of Australia's 2-3% target range. The increase adds pressure on the central bank to consider further interest-rate hikes.
Headline CPI also climbed to 4.3% from 4.0% over the previous 12 months. RBA deputy governor Andrew Hauser warned last week that prolonged above-target inflation is a “central banker’s nightmare” and that additional hikes remain on the table.
Market pricing now suggests roughly a 62% chance of a 0.25-percentage-point rate increase at the upcoming meeting, which would lift the cash rate to 4.85%, the highest level in 18 years.
National home prices have already fallen 5.5% this calendar year, matching the largest annual decline recorded this century in 2018. Economists note that further price drops could push the downturn beyond that benchmark.
“Another rate hike would exacerbate (price) falls,” said My Housing Market economist Andrew Wilson, adding that recent signs of bottoming in Sydney could be undone by additional tightening.
“It’s a climate of uncertainty,” said Ray White chief economist Nerida Conisbee, noting that unclear timing of peak rates could worsen the housing market more than during the Global Financial Crisis.
Major banks are expected to revise their price-fall forecasts. Commonwealth Bank’s latest model, which does not include a November or December hike, projected a 9% decline, while NAB forecast an 11% drop under the same assumptions. ANZ, after factoring in a possible November hike, now expects a 10.6% national price decline, with larger falls in Sydney and Melbourne.
Rising unemployment and higher arrears among first-home buyers, particularly those who bought in 2022, add to the risk of defaults. Equifax reported that about 1% of those buyers are in mortgage arrears, and its chief solution officer Kevin James warned that “first-home buyers are facing compounding challenges” from high prices, strict serviceability tests, and broader cost-of-living inflation.
RBA assistant governor Dr Sarah Hunter told a television program that the board feels the impact of borrowers struggling with repayments, but emphasized that reducing inflation remains the priority for the economy.