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What the RBA's latest hike means for the property market recovery

Experts say the Reserve Bank's shock decision to raise interest rates again will weigh on buyer confidence. However, with the supply of properties for sale still very tight, it may prove to be a mere 'speed bump' in the market recovery.

At its May board meeting, the RBA lifted the official cash rate by 25 basis points, marking the 11th hike in its tightening cycle, bringing the cash rate to 3.85% - its highest level since April 2012.

The hike was another blow to struggling mortgage holders, who will see their repayments increase - as well as borrowers, with maximum borrowing capacities now down by around 30% since rates started rising.

Housing supply still very tight

Belle Property head of network growth Nick Boyd said he did not believe the rate rise will deter buyers or sellers due to the fact the volume of homes available for sale was drastically low compared to previous years.

“And that's why these interest rate rises haven’t actually curbed the appetite for real estate,” he said.

“The reality is there are more buyers in the market.

“The silver lining in all of this is, that people who are going through hardship right now - with interest rate rises and cost of living - and they own a property, they should have confidence knowing that the market is stable enough to transact within if they need to.”

Impact on buyer confidence

AMP Capital chief economist Shane Oliver said the RBA decision has left “a bit of a cloud” over the housing market recovery.

Interest rates were always the main risk for the market recovery," he said.

“[This year] we started to see that recovery creeping through, with the key drivers being a surge in immigration at a time when property supply is very constrained, combined with a perception that interest rates were close to the top.

“But since then, we've had three hikes and that might cause some potential buyers to rethink.

“I suspect many buyers will consider holding off just to see how far the RBA does go with rates.”

PropTrack economist Anne Flaherty said the latest rate rise was going to impact buyer confidence.

“I think that many people have delayed decision making around both buying and selling until they see where interest rates end up,” she said.

“We had a pause last month, which helped restore a bit of confidence, but now that we've seen another interest rate rise, that's just going to make people feel a little bit more uncertain about what could happen.”

Borrowers yet to feel pinch

The lag between interest rate rises and its flow on effect on the economy was important to note, Ms Flaherty said.

“We know that there’s a several-month lag for mortgage holders so we are still seeing the impact of previous interest rate rises hitting mortgage holders.

“So yesterday's decision again is going to take several months to be fully felt in the economy.”

Mr Oliver said the best case was the May rate hike was a mere “speed bump” in the property market recovery.

“It causes things to soften a bit in the auctions, prices to flatten out a little bit but not come down a lot,” he said.

“But there is a risk that it knocks things lower and there’s always the risk that the more they (the RBA) keep raising interest rates, the greater the risk of recession.”

Price still up, despite capacities reducing

While the average buyer’s borrowing capacity now reduced by almost 30%, Ms Flaherty said in property prices have fallen significantly less than that.

“And in fact, over the first four months of this year, we've even seen property prices consistently rising,” she said.

“I think one of the reasons is the restricted stock of properties for sale, which means that buying environment is still quite competitive.”

Shortages within the construction industry and a reduction in housing supply were also supporting resilience in property prices, she said.

“I think the impact of interest rate rises is being felt disproportionately across our economy,” Ms Flaherty said.

“First home buyers have been among the hardest hit by these interest rate rises because essentially, the combination of price rises and interest rate increases has decreased their borrowing capacity and has effectively shut many first-time buyers out of the market.”

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