June 7 will determine the direction of the Australian housing market!

On Tuesday, the Reserve Bank of Australia held its April regular meeting. Although the interest rate remained unchanged at a record low of 0.1%, the remarks after the central bank governor's meeting indicated that Australia may raise interest rates ahead of schedule!

In a post-meeting statement, central bank governor Philip Lowe acknowledged that rising inflation was expected to continue, but said labour costs were lower than the central bank wanted.

"In the coming months, the Committee will have access to important additional evidence on the evolution of inflation and labour costs, and the Committee will assess this and other available information as its policy to support Australia's full employment and inflation outcomes consistent with its target ."

The statement dropped its usual reference to the RBA's willingness to be "patient" and hinted at a possible early rate hike.

However, given inflation data due on April 27 and wage data due on May 18, a rate hike before the election is unlikely.

The most likely time for a rate hike in Australia is June 7!

There is also a lot of speculation in the market about how many times the RBA will raise interest rates.

Australia rate hike forecast

AMP Capital chief economist Shane Oliver believes the RBA may take a more aggressive approach to interest rates at the start of the monetary policy tightening cycle, raising rates by 0.4 per cent in June to bring the cash rate to 0.5 per cent.

CBA, one of Australia's big four banks, expects the cash rate to peak at 1.25 per cent.

Financial markets are hinting at at least six interest rate hikes in Australia this year, which could take the current record low 0.1% cash rate to nearly 1.7% by December!

The futures market is even more aggressive, with the RBA expected to raise the official cash rate to around 3% by August 2023!

In any case, the central bank's interest rate hike is basically a sure thing, no matter how much it increases, it will indeed have an impact on the Australian housing market.

The national median house price is currently at a record level, and the ratio of house price valuations to income remains around 10.

With households saddled with high levels of debt, the impact of higher interest rates on household budgets will be a key consideration for the RBA.

During the pandemic, however, the Australian government's subsidies and Covid-19 restrictions have forced consumers to spend less, building up large cash buffers.

So, the economy was able to digest the first few rate hikes.

As long as it's not a very aggressive rate hike, it's not a big problem! The housing market is at best a small pullback amid overheating.

If the central bank is really as predicted by the futures market, what will happen?

Soaring Mortgage Rates Could Crash Home Prices

The Reserve Bank of Australia (RBA) has updated its lending rate indicator for March, showing mortgage rates are rising across Australia:

Both fixed and variable mortgage rates rose in March.

The average variable discount mortgage rate finally rose 0.15% from its pandemic-era low to 3.6% in March.

The three-year fixed mortgage rate also rose 0.3% to 3.8% in March and is now 1.7% above its March 2021 low.

The RBA will raise the official cash rate to around 3% by August 2023, according to the latest futures market forecasts.

That's the equivalent of 12 rate hikes in 16 months!

Assuming all of these hikes are passed on to mortgage holders, the average discounted variable mortgage rate would soar to 6.5% from the current 3.6%:

Mortgage rates hit 6.5% in 16 months, what's the concept?

Average mortgage repayments will increase by 39% from current levels!

Looking at the monthly mortgage repayments for the median house price in Australia, this is equivalent to an increase of $1049 from $2688 in March 2022 to $3737.

For Sydney buyers, the median monthly repayment for a house around the median price would rise by $1,585, while in Melbourne it would rise by $1143.

Clearly, such a sharp rise in mortgage rates will destroy household finances and hit the housing market as well as the local economy.

Thankfully, leverage is in the RBA's hands, not the market.

So the RBA is definitely not going to raise interest rates so aggressively to trigger an unnecessary house price crash and recession.

It is for these reasons that the RBA is unlikely to raise rates as quickly or as wildly as the market predicts!

Morgan Stanley forecasts that house prices will gradually decline through 2022, falling by 5% by the end of the year.

To be clear, this is hardly a blow to a market where a range of indicators are still hovering at record highs.

For an arguably overheated market, a 5% drop in house prices is little more than an adjustment.

Where is the support point of Australian house prices?

The latest CoreLogic Residential Values results for March show price growth has truly doubled, with stark differences between capital cities and between capital cities and regions.

Interestingly, the biggest driver of house price increases appears to be a decline in listings. The number of homes listed nationally in March was 30 per cent below the previous five-year average, with the drop in listings driven by the fastest-growing markets, namely Brisbane, Adelaide and regional areas.

This was despite the fact that annual growth in Australian capital city house prices remained strong at 16.3 per cent in March.

But Morgan Stanley MS strategist Chris Read said the national median house price was only up 0.3 per cent, suggesting continued pressure on prices!

The impact will become more pronounced as the RBA begins to hike rates.

By contrast, Sydney and Melbourne have seen an increase in listings over the past year, which helps explain their recent price weakness.

In Melbourne, the number of listings to the end of March was 8 per cent above the five-year average, while the number of homes available for purchase in Sydney has almost normalised, 7.5 per cent higher than a year ago and just 2.6 per cent lower than a year earlier.

With higher listings and less competition, buyers are gradually returning to dominance.

This means buyers have more time to consider their decision and negotiate the price.

By contrast, Brisbane and Adelaide listings are still more than 40 per cent below the previous five-year average and down about 20 to 25 per cent from a year ago.

The picture is similar in regional Australia, where total listings are 22 per cent below last year's levels and 43 per cent below the five-year average.

Such low inventory levels and continued high buyer demand continue to create strong selling conditions in these regions, supporting upward pressure on prices.

Second, the apartment market will also become the support point of this real estate correction!

Surging demand and dwindling rental supply have pushed median rents up more than 22 per cent in some inner-city Melbourne suburbs over the past 12 months, with more gains expected as vacancy rates tighten.

The median weekly apartment rent in inner Melbourne has risen the most over the year, with Docklands surging 22.2 per cent. Rents rose 21.6 per cent in South Bank, 20.5 per cent in West Melbourne and 17.7 per cent in metropolitan Melbourne.

In Sydney over the same period, median apartment rents rose 16.9 per cent in Pyrmont, 14.6 per cent in Ultimo and 14.3 per cent in Haymarket.

CoreLogic head of research Tim Lawless said many inner-city rental apartment markets had recovered from the trough of the pandemic.

The opening of Australia's borders, the return of international students, and the return of overseas immigrants will once again make the tight rental market even busier.

In this case, investors are coming back one after another.