Rate rises will result in a deceleration in GDP growth, says PEXA Chief Economist

On a CEDA livestream this week, PEXA Chief Economist Julie Toth said while there was a delay in transmission as the rate increases flow through to the rest of the economy, growth would ultimately take a hit. 

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The Reserve Bank of Australia (RBA) has increased the cash rate by 0.25 per cent, signalling further interest rate rises as it assesses the global economy, household spending and upcoming inflation data.

Appearing on a Committee for Economic Development Australia (CEDA) livestream panel on Tuesday, CEDA Senior Economist Andrew Barker said the six successive rate rises bring the cash rate to 2.6 per cent, up from its record low of 0.1 per cent during the pandemic.

“Australia is in the midst of the most rapid monetary policy tightening cycle in almost 3 decades,” he said.

PEXA Chief Economist Julie Toth said while there was a delay in transmission as the rate increases flow through to the rest of the economy, growth would ultimately take a hit.

“Because rate rises work by dampening demand, we will also see a deceleration in GDP growth and possibly employment growth,” she said.

While the rate rises put more homeowners at risk of defaulting on their loan, unemployment was cited as a bigger risk factor.

“Statistically the biggest indicator of default is job loss,” said Ms Toth.

“A rising unemployment rate is actually a much bigger concern than rising interest rates when we look at the potential for people to lose their homes or move from home ownership back into a rental.”

The RBA flagged on Tuesday that “some increase in the unemployment rate is expected as economic growth slows.”

Andrew Barker highlighted that workers who lose a job in Australia tend to experience large income losses.

“Income losses when you lose a job are generally quite high in Australia and that does put pressure,” he said.

“That distribution is very important about who is holding this high debt, because relatively high-income earners are probably able to reduce their discretionary spending more as well.”

Owner-occupiers are not hesitating to refinance in response to tightening monetary policy, with the PEXA refinancing index showing a 31.1 per cent weekly increase in the number of refinances and an 8.1 per cent monthly increase.

“What we’re seeing in the PEXA refinance index is record proportions of mortgage holders in that variable category looking to refinance their loans,” said Ms Toth.

For first home buyers, the rate rises so far this year will have decreased the amount they can loan by 20 per cent, according to the RBA. Mr Barker said this is making it more difficult for people looking to buy a house.

“While house prices are now falling across Australia, increasing interest rates are making housing less affordable for those with mortgages or looking at taking out a loan to buy a home,” he said.

The Australian Bureau of Statistics lending indicators released on Tuesday showed that the number of first home purchases was down 26 per cent year on year.

Angus Moore, an Economist at REA Group’s PropTrack, said Australia needed to do more to encourage housing supply.

“A big part of the problem we’re facing at the moment is construction costs have absolutely skyrocketed,” he said.

“At the same time, you’re seeing a lot of labour shortages.

“That’s all compounding with the fact that we actually have a record number of detached homes under construction. During the pandemic we saw a huge surge due in approvals and commencements of detached homes, in part due to homebuilder, in part due to low interest rates.

“Because of all those constraints it’s probably going to take longer than typical to work through that backlog,” Mr Moore said.

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