June rate hike unlikely to reverse housing market gain

The Reserve Bank of Australia (RBA) decision to hike rates up by a further 25 basis points to 4.1% in June may help only take some steam out of the housing market, according to CoreLogic.

Head of research, Eliza Owen, said that although for the past two decades there was a strong negative correlation between movements in the RBA cash rate and the CoreLogic Home Value Index, the housing market has defied expectations, “like many trends since the pandemic”.

“With continued strong demand from a surge in overseas migration, a slow return to pre-pandemic household size in the capital cities, and persistently low levels of advertised supply, the June rate hike may only serve to take some steam out of the recovery trend in housing values, rather than reverse recent gains,” she noted.

Owen said that a mix of outcomes across economic data in May created ‘line-ball’ call for the outlook in the cash rate.

Although the CoreLogic’s index accelerated in May, rising 1.2% nationally and while established home and residential land values did not directly feed into the CPI housing indicator, there was a possibility of some risk to inflation from rising homes prices.

But RBA revised forecasts for consumption growth a little higher and its June statement acknowledged the fact that house prices were rising again.

Although the monthly rate of growth in the CoreLogic rental index eased in May, rents continued to rise well above historic averages at 0.8%.

“The CoreLogic rent value index presents a leading indicator for the trajectory of CPI rents, where CoreLogic imputes an estimate of market rent based on listings evidence, while the CPI measures rents actually paid. It suggests that those rolling off fixed-leases may expect a rental increase, adding further upwards pressure to rental inflation,” Owen said.

“However, there is weakness in other facets of housing market activity.”

This included falling new dwelling approvals to -8.1% in April and the fact that a higher interest rate environment could deter the supply of new housing which in turn would continue to ease price pressures in the delivery of new dwellings as the construction pipeline slows.