A looming hike in Australia's official cash rate will result in a crash of the property market goes the theory – but one of the nation's top economists says that's unlikely to happen.
Analysing the potential impact of a rate hike, AMP Capital's Chief Economist Dr Shane Oliver said while he expects house prices to fall up to 15 per cent over the next two years, he cannot see the market crashing altogether.
As he points out, the Australian housing market has been remarkably resilient in the past two decades despite a myriad of economic conditions.
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"House price crash calls have been a dime a dozen over the last two decades, only to see the boom roll on after periodic dips," Dr Oliver said.
"So, the experience since the early 2000s warns against getting too bearish. Some would see a 15 per cent fall in prices as a crash, but I take it to mean prices falling 25 per cent or so.
"Our assessment is that while a crash is possible, it is unlikely unless we see very aggressive rate hikes – say taking the cash rate to 4 or 5 per cent – or much higher unemployment, driving a sharp rise in defaults and forced property sales."
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However, Dr Oliver said the risk of a crash "cannot be ignored" given that borrowers have not seen a rise in interest rates in more than 11 years.
The last time the RBA actually hiked rates was in October 2010, when it increased the cash rate by 25 basis points to 4.75 per cent.
"The housing downturn will affect the economy via negative wealth effects on consumer spending (ie, wealth goes down, we feel poorer, we spend less) and a slowing in housing construction," he said.
"The former was a significant drag on the economy in the 2017-19 period when a 10 per cent fall in average home prices contributed to a significant slowing in consumer spending."
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Currently Australia's official cash rate is at the historic low level of 0.1 per cent.
As much recent commentary has noted, that's a far cry from the actual interest rates borrowers are paying – but given the official cash rate impacts the bottom line of lenders it's likely that any change will be passed on to customers.
All four of Australia's big banks now forecast the RBA to raise interest rates in June this year, kicking off an "avalanche" of consecutive raises until the official cash rate is 1 per cent by the end of 2022 and 1.5 per cent by mid-2023.
Analysis from financial comparison site Finder shows that a 75 basis point increase would cost the average borrower $3,175 this year by raising repayments by $265 a month.
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Head of consumer research at Finder Graham Cooke said lenders are already factoring in interest rate rises into their margins.
"That's why banks have increased rates across over 400 fixed rate home loan products over the last week – some by up to 75 basis points," Mr Cooke said.
"This indicates that they may be anticipating not one, but an avalanche of rate rises later in the year. The question is when, and that could be decided by international events.
"Cash rate rises are like buses: they may take a while to come, then arrive one after another."
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