Good times are fading for property buyers with rate hikes on the horizon
- All 28 experts in the finder.com.au Monthly Reserve Bank Survey expect no change
- The cash rate is forecast to rise in June 2015 according to the survey results
- Property buyers need to prepare for tougher times ahead!
OCTOBER 4, 2014, SYDNEY – The good times for property buyers are soon coming to an end, with the latest Reserve Bank Survey conducted by one of Australia’s biggest comparison websites finder.com.au showing interest rates are expected to rise for the next three years ahead.
The finder.com.au monthly Reserve Bank Survey of 28 leading experts, including from all four major banks, unanimously expect no change to the official cash rate at the Reserve Bank board meeting on Tuesday, October 7, 2014. However, all respondents forecast a rate rise next year, with many betting on a gradual interest rate upward cycle for the next three years.
For the first time, finder.com.au has released a forecast of when the cash rate is likely to rise. According to the survey, the cash rate is expected to start rising in June 2015.
There is a 46 percent chance of an increase during the third quarter of 2015, a 21 percent chance that rates will begin to rise in the first quarter next year, an 18 percent chance of rates to start rising in the second quarter of 2015 and a 7 percent likelihood of rate hikes from October next year (please see below table for more details).
finder.com.au Reserve Bank Cash Rate Predictor:
Next rate riseNumber of survey respondentsLikelihood of rate rise
Source: finder.com.au Reserve Bank Survey, please note 1 of 28 respondents NA for this question
Methodology: to predict the cash rate forecast, we used the median month in each quarter or half from the 27 respondents who provided a forecast, and averaged the results to predict the month of June 2015.
Michelle Hutchison, Money Expert at finder.com.au, said that the end of cheap interest rates is coming to an end and property buyers need to be cautious with their borrowing levels.
“The finder.com.au Reserve Bank Survey sentiment revealed that many factors will keep the cash rate at the current low level of 2.50 percent. Inflation being subdued, the low Australian Dollar, and damage to property markets outside Sydney and Melbourne should the cash rate rise too soon.
“However, the good times for property buyers are not expected to last much longer, with our survey showing the next rate rise being forecast for June 2015, and a 21 percent chance that the cash rate will start rising from the first quarter of next year.
“The cash rate is expected to gradually increase over the next two-three years and hit a ‘new normal’ level of 4 percent, according to the survey. Only 11 percent of the 28 experts surveyed believe the cash rate will reach the historical average of about 5 percent, while the majority (64 percent) believe a ‘new normal’ of below 5 percent will be reached.
“About one in three (32 percent) of the experts surveyed are expecting the cash rate to hit a ‘new normal’ by 2016, while 29 percent are expecting it to happen in 2017. Only one respondent, Chief Economist at Commonwealth Bank Michael Blythe, is expecting a ‘new normal’ cash rate level to be reached in 2015. The remaining respondents were unable to comment.
“If you’re an existing home buyer or hitting the property market this mortgage season, make sure you prepare a buffer for when interest rates rise. This is the time when you should be paying as much as you can on your mortgage, to lower the impact of higher rates.
“It’s also a good time to compare home loans online and find a better deal because a small discount can make a big difference to the cost of your loan. For instance, 0.25 percentage points discount on a $300,000 home loan is worth about $50 per month or about $18,000 over a 30-year loan term.”
Insights from the latest finder.com.au monthly Reserve Bank Survey:
Expert/Economist, OrganisationWhen do you think the Reserve Bank will change the cash rate?What do you think the ‘new normal’ cash rate will be?
|Garry Shilson-Josling,AAP||Q3 2015||4%|
|Shane Oliver,AMP||Q3 2015||3.75%|
|Steven Pambris,Bank of Sydney||Q4 2015||3.5%|
|David Bassanese,BetaShares||Q1 2015||4.5%|
|Richard Robinson,BIS Shrapnel||Q3 2015||3.75-4%|
|Michael Blythe,CBA||Q1 2015||3.5%|
|Savanth Sebastian,Commsec||Q1 2015||3.75%|
|Andrew Wilson,Domain Group||NA||NA|
|James Bond,Financial Services Council||Q3 2015||NA|
|David de Ferranti,FXCM Australia||Q3 2015||NA|
|Scott Morgan,Greater Building Society||Q1 2015||4.5%|
|Paul Bloxham,HSBC||Q2 2015||4-4.25%|
|David Scutt,Independent Market Strategist||Q3 2015||3.75%|
|Michael Witts,ING Direct||Q1 2015||3.5-4%|
|Paul Clitheroe,IPAC Securities||Q3 2015||NA|
|Grant Harrod,LJ Hooker||Q3 2015||NA|
|John Caelli,ME Bank||H1 2015||NA|
|Glenn Levine,Moody’s Analytics||Q3 2015||4.5%|
|Lisa Montgomery,Mortgage & Consumer Finance Expert||Q2 2015||4%|
|Alan Oster,NAB||Q4 2015||4.25%|
|Jonathan Chancellor,Property Observer||Q2 2015||4%|
|Angus Raine,Raine & Horne||Q3 2015||4%|
|Nathan McMullen,RAMS||Q3 2015||3.5%|
|Janu Chan,St. George Bank||Q2 2015||3.5-4%|
|Gavin Smith,State Custodians||Q3 2015||NA|
|Scott Haslem,UBS||Q2 2015||NA|
|Nicki Hutley,Urbis||Q1 2015||5%|
|Bill Evans,Westpac||Q3 2015||NA|
Source: finder.com.au, ordered alphabetically by organisation
What our experts had to say in the finder.com.au Monthly Reserve Bank Survey:
- Garry Shilson-Josling, AAP: “The RBA will leave the cash rate at 2.5 percent this month, sure as eggs. It’s the same old story – the housing market is still too hot to allow any serious thought of a rate cut, but the transition away from mining is too slow to bring rate rises back onto the agenda.”
- Shane Oliver, AMP: “While housing related indicators are strong, providing a reason not to cut rates further, the rest of the economy is sub-par. Uncertainty remains high regarding how quickly the mining investment boom will unwind, inflation is benign and the Australian dollar remains too high – all of which suggests it's premature to start raising rates. The most recent commentary from the RBA has indicated that a period of stability in rates remains prudent. This language is likely to be dropped well before the RBA starts hiking rates.”
- Steven Pambris, Bank of Sydney: “Economy still to find its way.”
- David Bassanese, BetaShares: “Mixed economic outlook, with unemployment high but signs of economic recovery and a weaker Australian dollar.”
- Richard Robinson, BIS Shrapnel: “Economy and employment growth is weak, and inflation contained. RBA would like to cut rates to engineer a decline in the Australian dollar, but overheated housing market prevents a rate cut.”
- Michael Blythe, CBA: “The Reserve Bank is still very firmly committed to this idea of stability in interest rates, and this looks set to continue.”
- Savanth Sebastian, Commsec: “Interest rate stability has been the mantra by policymakers. The economy is lifting, falling currency will help to rebalance effort away from mining to export sectors.”
- Andrew Wilson, Domain Group: “We're heading into another month of rates sitting where they've been since August last year, although we have a similar economic environment in terms of the underlying factors to interest rate policy. We have had changes recently, that are perhaps starting to change the outlook – certainly the underlying factors of macro-policy. We've seen the Australian dollar fall over the past month, now heading in the direction the reserve bank has wanted, and has wanted for the past two years.”
- James Bond, Financial Services Council: “The data in the past month has done little to change the view that rates will be on hold till at least the second half of next year. The RBA will continue to wait to see how the employment trend settles over the coming months. The RBA Board will be pleased with the fall in the Australian dollar and should the currency persist at a lower level, this will give the Bank the capacity to raise rates earlier to take the heat out of the housing market. Any application of macro-prudential measures will only further enhance the prospect of rates being on hold for some time as these measures are largely untested and the outcomes difficult to predict.”
- David de Ferranti, FXCM: “Domestic economic data has not changed sufficiently to warrant any change in RBA policy at the October meeting. Labour market conditions remain subdued in spite of a bumper set of August jobs figures. Consumer and business sentiment have been resilient but have room to recover. A deterioration in Chinese economic data and slump in commodity prices are also concerns for the central bank. Overall, there remains a need to retain highly accommodative policy to support the rebalancing of the economy from one led by mining investment. At the same time the RBA is unlikely to cut rates in order to avoid fueling a housing bubble.”
- Scott Morgan, Greater Building Society: “The RBA has indicated a period of stability in rates and I do not see that changing in the immediate term. Having said that, the RBA is cognisant to a potential build-up in asset prices and the flow on risks that causes. There is scope for rate increases inside the next six months supported by these risks, the likely upward moves in US rates which will continue to cause a reduction in the Australian dollar and improving economic indicators in the Australian Economy around GDP, unemployment and retail sales.”
- Paul Bloxham, HSBC: “For the moment there's still concern that the labour market has spare capacity, and that they'd like the unemployment rate to be declining before they raise interest rates. By the same token, I don't think they've got scope to cut interest rates any further because the housing market continues to boom.”
- David Scutt, Independent Market Strategist: “The RBA will keep the cash rate steady at 2.50% in October, the fourteenth-consecutive month that this has occurred. They will keep their neutral bias and communicate that ‘the most prudent course is likely to be a period of stability in interest rates.’ While on the surface the grounds for a return to a hawkish bias seem to be building, most economic indicators have been improving, the Australian Dollar has fallen while unease towards developments in the established housing market is growing, counteracting those forces are real-negative wages growth, subdued business confidence along with a noticeable deterioration in recent Chinese economic data, something that along with recent USD strength has seen the prices for Australia’s key commodity exports fall sharply. Given that household consumption and non-mining investment will be crucial in offsetting the effects of the slowing mining capital expenditure boom in the years ahead, there are simply too many uncertainties at present for the RBA to adopt anything other than a wait-and-see approach. When, and only when, they see non-mining activity start to accelerate sharply will they begin the process of policy normalisation. If that doesn't occur, not my baseline forecast but certainly a possibility, an extended period of policy stability, or even further easing, appears likely.”
- Michael Witts, ING Direct: “The economy is still in transition, and despite the RBA being concerned about the housing market, they would be reluctant to increase rates given the impact on the exchange rate. Also employment data has been highly volatile over the past few months ... The action by the RBA is constrained by the action of US Fed and this will drive local timing. Also the exchange rate is a further constraint, the RBA would like to see the Australian dollar well under 90 US cents.”
- Paul Clitheroe, IPAC Securities: “Sydney and Melbourne house prices are very strong, but not nationally. Rate rise will damage smaller states. Dollar is falling, RBA like it lower, hence no rate rise”
- Grant Harrod, LJ Hooker: “The economy continues to perform as expected by the RBA. Employment and private investment remains the chief concern, however, these should be helped by the recent softening of the Australian dollar. Housing markets continue to remain buoyant with the growth seen in Sydney and Melbourne having a ripple effect out to the other, more affordable, capital city markets. The associated growth in construction is also helping rebalance the economy. However, price growth and investor demand for housing, especially in Sydney and Melbourne, has seen the RBA raise the prospect of introducing macro prudential measures to help de-risk the market.”
- John Caelli, ME Bank: “We don’t expect interest rates to change in October despite the Australian dollar falling and concerns about rising house prices. The RBA’s key focus remains on providing conditions to support business investment and employment. That the RBA has flagged macro prudential tools to manage house prices suggests they may be considering options to deal with the situation beyond just interest rates. The RBA minutes continue to refer to a period of stability in interest rates and so we expect any rises in rates won’t occur until the first half of 2015.”
- Glenn Levine, Moody’s Analytics: “The economy is expanding below potential, but with house prices still growing uncomfortably quickly there is no scope for an interest rate cut.”
- Lisa Montgomery, Mortgage and Consumer Finance Expert: “With inflation consistent with target, the RBA will continue to leave rates on hold for the remainder of this year. The board will be keeping a keen eye on the data released in the first week of October, particularly in relation to building approvals and new home sales. The Board remain concerned in relation to their view of the Australian Housing Market being 'unbalanced' and the potential effect on future household spending. That said, the retail trade and private sector credit numbers should remain encouraging when released this week.”
- Alan Oster, NAB: “The Reserve Bank is still waiting to see if they can fill in the hole that's been created by mining business investment falling, so they're still waiting to see if the consumer is going to be spending more. They need to see what's happening in the property market, and they also need to get a better handle in terms of what's happening in the labour market. So at this stage, they've done a lot – they don't want to do any more and they're sitting and waiting.”
- Jonathan Chancellor, Property Observer: “The recent Sydney house price boom, after years of little growth, is not a sufficient trigger for the bank to make any move. The domestic economy appears to be strengthening, but the international outlook looks tricky to draw any firm conclusion ... It was interesting that the RBA has signalled it was looking at macroprudential moves to help contain the current property exuberance. I still reckon they will stick with simply stepping up its public warnings around housing prices and investor activity. A reasonable conclusion is that Australia is unlikely to introduce the New Zealand style of direct macro prudential controls.”
- Angus Raine, Raine & Horne: “Inflation is still within the acceptable 2-3% range, and unemployment is holding steady at <5%>
- Nathan McMullen, RAMS: “Settings remain mildly expansionary relative to long run averages and are appropriate given the current outlook for inflation, unemployment (expected to rise slightly) even noting property price growth trends ... We do not expect rates to increase as materially as suggested given macroeconomic conditions are not likely to trigger a change to rates of the scale suggested”
- Janu Chan, St. George Bank: “The RBA is in a bind. It is still concerned with the weakness in the labour market, drag from mining investment and its expectations for growth to be a little bit below trend. However, recovering non-mining sectors and growing concern about rising house prices will prevent the RBA from supporting the economy with even lower rates. The message of "stability in interest rates" is likely to continue for a bit longer ... The Australian dollar could be a big swing factor. The further it falls, the more likely it could bring forward rate hikes or speed them up.”
- Gavin Smith, State Custodians: “We do not anticipate any change to policy at October’s meeting given the sluggish growth conditions present in the domestic economy and the potential for geo-political ructions to erode confidence in the financial markets near term. On the housing market, we maintain that the Reserve has more effectiveness in delivering verbal warnings to address sustained HPI spikes than a hard policy response. No change in October.”
- Scott Haslem, UBS: “Economy not strong enough to warrant a hike, and property too strong to warrant a cut…”
- Nicki Hutley, Urbis: “The balance of macroeconomic indicators suggest that growth has improved in 2014 and is close to trend, but is not yet accelerating sharply enough to concern policy makers. Unemployment and subdued wages will keep inflation from rising too quickly for a little longer ... It is easy to think that, because growth and inflation have been modest for a prolonged period, that they will remain so indefinitely. There is clearly momentum building in the economy however and, notwithstanding slower mining investment, this momentum will lift growth and inflationary pressures over the coming year.”
- Bill Evans, Westpac: “We do not expect to see the Reserve Bank changing rates anytime over the next year. Indeed, the Bank once again confirmed its intentions in its September board minutes for a period of stability in rates. Westpac expects that, with our expectation of a more favourable economic environment than is anticipated by the Reserve Bank, the next move in rates will be a tightening but not until the second half of 2015, with August currently appearing to be the date for the first move.”
- Please note: The above respondents are ordered alphabetically by name of organisation. Some of these quotes are derived from full comments provided to finder.com.au and available on the finder.com.au RBA cash rate page.
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The information in this release is accurate as of the date published, but rates, fees and other product features may have changed. Please see updated product information on finder.com.au's review pages for the current correct values.
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