Introduction
The Reserve Bank of Australia has undertaken one of the most aggressive interest rate hikes in recent years. With 11 consecutive increases in one year, the interest rate reached 3.85%. Although the RBA continues to work to maintain cash flows and ensure high economic stability in Australia, an increase in interest rates could lead to significant changes in the residential real estate market in the country. This essay discusses the impact of the RBA interest rate hike on the activity and performance of the residential real estate market.
The Influence of Interest Rates on Real Estate
The recent increase in the interest rate by the Reserve Bank of Australia has had a significant impact on the operations and outcomes of the residential real estate market. First, the increase in the interest rate led to a rise in the cost of mortgage loans, which led to an increase in mortgage payments and a decrease in the availability of home loans (Kearns et al., 2021). As a result, the demand for residential real estate began to decline. This has also led to lower housing prices and showed a drop in the income of developers and investors in the residential real estate market.
On the other hand, higher interest rates could increase the value of bonds, and consumers will invest in them rather than housing. Thus, the domestic money supply will move from the residential real estate market to bonds. Second, the increase in the interest rate has led to increased tension in the cash flow market. Banks are taking action to increase lending opportunities for households and investors by providing them with more expensive and longer loan terms (Saunders and Tulip, 2020). As a result, the cost of mortgage loans has become higher, which has led to a further decrease in the need for housing.
Third, the increase in the interest rate has led to a rise in the time spent on money by investors and households (Caddy et al., 2020). This has increased income requirements and housing investment costs as more money is needed to get a mortgage.
The Reserve Bank of Australia’s recent interest rate hike has greatly influenced the dynamics and overall condition of the residential housing market. This led to higher borrowing costs, increased the requirement for income and investment costs, decreased the need for housing, and decreased the revenue of developers and investors in the housing market (Wong et al., 2020).
However, the RBA has developed a policy encouraging the residential real estate market. They have taken several measures to maintain the availability of home loans, particularly the provision of temporary mortgage loans at low-interest rates. These measures support the demand for housing, preventing prices from falling and keeping the Residential Property Market active.
So far, the residential real estate market in Australia has shown high activity. According to the National Bureau of Statistics, the average home price in Australia in 2018 was 15% higher than in 2017 (Debele, 2020). However, this growth may change after the latest interest rate hikes. Other residential real estate market indicators may also change, as a higher interest rate may force most people to change their risky behavior and make them more conservative.
Conclusion
In conclusion, the RBA interest rate increase may have a big effect on the residential real estate market in Australia. High-interest rates could reduce the availability of home loans, increase mortgage payments and shift cash flows from the housing market to bonds. However, the impact of the interest rate hike on the residential real estate market remains limited. The RBA is taking measures to maintain the availability of housing loans, which allows the residential real estate market to continue to show high activity. However, as interest rates rise, the impact of the RBA on the residential real estate market will become more pronounced.
Reference List
Caddy, J., Delaney, L., and Fisher, C. (2020) ‘Consumer payment behaviour in Australia: evidence from the 2019 Consumer Payments Survey’.
Debelle, G. (2020) ‘The Reserve Bank of Australia’s policy actions and balance sheet’, Economic Analysis and Policy, 68, 285-295.
Kearns, J., Major, M., and Norman, D. (2021) ‘How Risky is Australian Household Debt?’ Australian Economic Review, 54(3), 313-330.
La Cava, G. (2019) ‘The labour and capital shares of income in Australia’. Reserve Bank of Australia Bulletin.
Saunders, T., and Tulip, P. (2020) ‘A model of the Australian housing market’, Economic Record, 96, 1-25.
Wong, P. Y., Wong, W. W., and Mintah, K. (2020) ‘Residential property market determinants: evidence from the 2018 Australian market downturn’, Property Management, 38(2), 157-175.