July’s 0.5% rate rise by the RBA has certainly captured news headlines. Understandably so. We have just experienced one of the sharpest series of rate rises since the early 1990s and there is more to come.
What does an interest rate rise do?
RBA’s control of interest rates (coupled with the PR machine around it) can only temper the demand side of the economy. There are however, many serious and uncontrollable issues on the supply side. Supply constraints are forcing prices up which is (in part) the result of devastating floods, an ongoing war in Ukraine, labour shortages, and logistics constraints.
All this comes at a time when the broader residential market is coming off the boil. A decline in the general residential market makes owners feel poorer, so they spend less. At least that is the hope of Mr Philip Lowe and Dr Jim Chalmers. They both desperately hope property owners and renters the like, feel the cost-of-living pressures and start to rein in spending.
Will household spending fall?
Household spending represents about 55% of Australia’s GDP. Less spending equals less demand. Both the RBA (via increased interest rates) and the general economy (via less spending) will hopefully combine to temper demand, sending a signal to the supply side to drop prices and put the inflation genie back in the bottle.
The risk of course, is this all creates a shrinking economy which we don’t want to shrink too much or too fast.
Relative to the housing market, the ongoing rise in interest rates and inflation pressures are helpful for apartment values. With home buyers lending budgets reduced, and cost of living pressures nibbling away at the deposit, many buyers will lower their budget which brings apartments more into the frame. Similarly, many people will rent for longer helping rental demand and values.
We all have lots of reasons to spend less but the base line for our standard of living has been cemented in place over the last few decades of prosperity. Hopefully the recovery is swift and shallow.