The View | Higher interest rates unlikely to cool Asia-Pacific’s red-hot housing market any time soon
- Raising borrowing costs will do little to bring down soaring home prices across a rapidly urbanising region, where demand in cities like Seoul and Sydney continues to far outstrip supply
In the second quarter of last year, Australian house prices hit an all-time high, having staged a spectacular recovery since the Covid-19 pandemic erupted in March 2020.
The combination of huge government stimulus programmes, rock-bottom interest rates, a strong labour market and the virus-induced “race for space” caused home values to soar in the face of the economic turmoil inflicted by the pandemic.
At the time, National Australia Bank, which compiles a quarterly residential property survey, expected the growth in prices in Sydney and Melbourne – the largest and priciest housing markets – to slow sharply this year, but to still rise 3-4 per cent, partly because it expected interest rates to remain unchanged until 2024.
Fast forward one year, and the bank admits it was caught out by a market that “turned slightly quicker” than it anticipated. According to its latest survey, published last month, prices in Sydney and Melbourne will remain flat this year, and will contract by more than 11 per cent in 2023.
A number of factors are at play, but the one weighing on sentiment the most right now is the strikingly hawkish pivot by the Reserve Bank of Australia (RBA), which raised rates by a much-sharper-than-expected 25 basis points on May 3 and signalled the most aggressive tightening campaign since the 1990s.
The RBA’s abrupt policy shift is part of a rapidly accelerating worldwide move away from easy money to counter the surge in inflation. It is also the latest demonstration of a more forceful attempt to address financial risks stemming from overheated housing markets and high levels of household debt.