RISING INTEREST RATES AND WHAT THEY MEAN FOR AUSTRALIANS IN THE PROPERTY MARKET
- the Reserve Bank of Australia (‘RBA’) has increased the cash rate by 75 basis points in May and June of this year
- cash rates are predicted to continue to increase throughout the year
- borrowers should prepare for rising interest rates and less disposable income
- buyers with significant savings are in a better position to enter the property market
In May of 2022 the RBA increased cash rates by 25 basis points, increasing the standard rate from 0.10% to 0.35%. This past Tuesday the RBA has again increased the cash rate by 50 basis points to 0.85%.
The nation has not experienced a similar rate increase since the beginning of the millennium. With interest rates set to continue to rise throughout 2022, the changes have many Australian homeowners worried.
The Role of the Reserve Bank of Australia
The RBA is the Central Bank of Australia and is governed by the Reserve Bank Act 1959 (Cth). The role of the RBA is to ensure economic stability by regulating currency and employment rates. This is achieved through the setting and executing of monetary policy. Setting the nation’s cash rate is central to this responsibility. The cash rate is the interest rate of the cash market in which banks lend and borrow money from each other.
Why have cash rates increased
The primary reason for the RBA increasing the cash rate is to regulate rising inflation. The beginning of 2022 saw the nation’s inflation rate reach 5.1%, significantly exceeding the RBA’s goal of between 2% to 3%. The rise has also been attributed to the resulting disruptions in the supply chain from COVID-19 and the crisis in Ukraine.
How does this affect borrowers?
The cash rate rise will primarily affect Australian borrowers who have loans with variable interest rates. With the increase in cash rate increasing the cost of lending, the big banks are already passing this additional cost onto mortgagors. Borrowers lucky enough to have taken advantage of favourably low interest rates in recent years will not be affected until their periods of set rates expire in the coming years.
Many Australians are struck by the irony of the RBA’s move to combat inflation again increasing the cost of living. Philip Lowe, the Governor of the RBA, predicts that the nation’s inflation rate will rise significantly before falling to 2% to 3% within the year. In other words, Australians should buckle down because it will get worse before it gets better.
How does this affect Buyers?
It is not all bad news. Rising interest rates may be good news for potential home Buyers with significant savings. The interest rate rise may also lead to an increase in disposable income for Buyers with savings or term deposits. Experts predict the property market to fall and more houses to become available. Buyers are likely to be in a better financial position to purchase property with more stock available at a more affordable price.
Despite this, Buyers entering the property market will be facing much higher interest rates compared to what the nation has enjoyed in recent years. This will also affect the borrowing power and scope for many Buyers.
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