Sydney’s property prices have reacted to the extraordinary decision by the Reserve Bank of Australia (RBA) to increase interest rates for the second time in two months. The increases total 125 basis points, and all expectations are that the RBA will increase the rates by a further 50 basis points when next they meet. The scale of the rate increases has taken Australian homeowners by surprise. Sydney property prices have responded with an unapparelled drop in value of an annualised 20% or more.
The RBA uses the CoreLogic daily index data as a housing benchmark, so we’ve used that as a comparative basis. The data shows that over the last 30 days, Sidney home values have plunged from +2.83% in August 2021 to -2.21% on July 11, 2022, an annualised drop of more than 20%.
This disastrous price drop appears to have surprised many economists and financial analysts. Homeowners are also in shock. Many had followed the advice of the RBA to borrow and take advantage of the low-interest rate environment. The bank had said low-interest rates were here to stay until at least 2024.
Sydney’s home prices fell by an astonishing 1.6% during June. This month prices have continued to fall at an even faster rate, dropping another 0.7% in the first 11 days of the month. Though lagging slightly, prices in Melbourne closely follow Sidney price trends. In June, Melbourne homes lost 1.1% of their value followed by a further 0.4% in the first few days of July.
It is likely that this huge drop in prices will have an enormous negative impact on business and consumer confidence. This will result in a huge drop in consumption. There is general agreement that increasing interest rates will continue to impact house prices. Still, some optimistic real estate agents claim that there are homes that will continue to grow in value over this time. They argue that some property prices are immune to the interest rate shock.
Homeowners are bracing themselves for another increase of 50 basis points next month as the RBA responds to the inflation, the result of global supply shocks. The reduction in the value of homes may reign in the bank’s ability to raise interest rates later in the year. The RBA may even have to cut rates next year in the face of the unprecedented loss of home equity.
Australian families face several major financial problems over the short to medium term these include:
- The quickest rise in interest rate in the last 25 years will have a huge impact on disposable income
- An unparalleled drop in the value of their most important asset
- The biggest drop in superannuation savings since the Global Financial crisis
- A substantial decline in the growth of real wages caused by high inflation
- Possible tax increases and growth-inhibiting fiscal policies are likely to inflict further pain in the foreseeable future.
Inaccurate forecasts have been blamed for past RBA policy mistakes. As the bank continues with its aggressive approach to changes based on forecasts that may be equally suspect, we hope that we’re not in for more unnecessary financial pain.
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