‘RBA to hike in August’, says investment bank as property market pushes on up

Property prices nationally are up 5.9 per cent over the financial year to date and are expected to rise a further 2 to 5 per cent in the 2024-25 financial year.  (ABC News: John Gunn)

Australian property prices are expected to increase by as much as 5 per cent in calendar year 2024, according to the June PropTrack Property Market Outlook Report.

The property data firm – a division of REA Group – notes that prices have already risen 2.7 per cent from January to May.

Property prices nationally are up 5.9 per cent over the financial year to date (FYTD) and are expected to rise a further 2 per cent to 5 per cent in the 2024-25 financial year (FY25).

"Buyer demand remains strong despite interest rates sitting at 12-year highs, borrowing capacities falling and the volume of stock for sale increasing, leading property prices to rise at a faster rate than expected," PropTrack director of economic research and report author, Cameron Kusher, said.

This is similar to the findings from recent reports from CoreLogic and AMP.

That is, despite some economic headwinds, demand in the property market continues to overwhelm supply.

"Over the next financial year, the introduction of Stage 3 tax cuts and projected interest rate cuts have the power to further entice buyer demand while supply from new dwelling commencements and completions are expected to remain low," Mr Kusher said.

Elevated immigration levels are also supporting property market demand.

"Housing demand is high due to strong net migration and changes in household formation," Fitch Ratings noted.

"Conversely, supply is low, with CoreLogic's total home listings in [the third quarter of 2023] below the five-year average and the Australian Bureau of Statistics' annual dwelling completions declining after peaking in 2019."

Fitch Ratings expects nominal home prices to grow by 4 per cent to 6 per cent in 2024 following likely growth of 9 per cent in 2023, from the trough in January 2023.

More modest rises, it notes, of 3 per cent to 5 per cent will follow in 2025.

This is also consistent with the ANZ Bank's property market forecasts.

"We got capital cities a little stronger at 6 to 7 per cent [price growth] for the 2024 calendar year," ANZ senior economist Blair Chapman said.

"It's been driven by strong growth in Perth, especially, and Brisbane and Adelaide."

Perth, according to PropTrack research, is projected to lead home price growth again in the coming financial year, albeit at a slower pace, having risen 18.9 per cent over the full-year to date (FYTD) and predicted to increase a further 8 per cent to 11 per cent during calendar year 2025.

Melbourne property market an outlier 

Despite varying rates of home price growth in Brisbane (+12.2 per cent), Sydney (+5.8 per cent) and Melbourne (+0.8) over FYTD, each city is projected to see home prices rise between 3 per cent and 6 per cent in FY25.

Home prices in Adelaide are expected to grow by a more moderate 5 per cent to 8 per cent in FY25, following prices soaring 12.9 per cent over FYTD.

So, why is the Melbourne property market seeing relatively subdued price growth?

"Investors aren't as pleased with Melbourne as they are with other states," the ANZ's Dr Chapman told the ABC.

"You don't get as much rental yield return as you might in other states."

Put simply, demand, thanks to a surging population is greater than supply in Perth, pushing property prices higher.

While higher levels of property construction in Melbourne, despite increases to the population, have meant there's a rough balance of demand and supply currently in the city's property market.

Stronger-than-expected inflation 

The cost of housing also feeds into the Bureau of Statistics measure of inflation.

The monthly Consumer Price Index Indicator rose 4 per cent in the 12 months to May, up from 3.6 per cent.

Rent inflation decreased slightly from 7.5 per cent to 7.4 per cent.

The cost of new dwelling purchases by owner-occupiers remained steady at 4.9 per cent in the year to May.

But the cost of other services like energy, education, healthcare, and banking and insurance remained elevated.

Where to for interest rates?

Several economists have warned it puts pressure on the Reserve Bank to increase interest rates at its next meeting in August.

"All of today's CPI numbers were a bit of a surprise, a bit on the upside," Dr Chapman said.

The ANZ Bank has already pushed back its forecast for the RBA's first interest rates cut from November 2024 to February 2025.

"We don't see the need for pushing that further out yet and we'll wait to see the quarterly numbers whether we need to think about a hike."

"The risks of [an RBA interest rate hike] have increased," he said.

The NAB has, on the other hand, pushed back its forecast for the first RBA interest rate cut.

"We now expect the RBA to remain on hold for longer, with a first rate cut now unlikely until May 2025 (previously November 2024)," the bank's chief economist Alan Oster noted.

"From there we see a steady profile of one cut per quarter back to 3.10 per cent, now reaching that point in mid-2026."

Deutsche Bank now expects the RBA to hike interest rates at its next board meeting.

"In light of a significantly stronger than expected trimmed mean inflation print for Australia in May, we now expect the RBA to hike by 25bps to 4.6 per cent at its next meeting in August," chief economist Phil O'Donaghoe noted.

And BetaShares chief economist David Bassanese was equally firm in his view on interest rates.

"[Wednesday's] May monthly CPI report can only be described as a 'shocker' and places huge pressure on the Reserve Bank to raise interest rates in August.

"While the monthly CPI reports contain partial information and tend to be volatile, stepping back from the month-to-month noise, one clear disappointing signal emerges — annual inflation across various measures has failed to decline much further in 2024, and remains 'stuck' at an uncomfortably high level of around 4 per cent.

"Most concerning, annual trimmed mean inflation jumped from 4.1 per cent in April to 4.4 per cent in May.

"The seasonally adjusted annual inflation rate jumped from 3.8 per cent to 4.1 per cent.

"Excluding volatile items and holiday travel, annual inflation did ease modestly from 4.1 per cent to 4.0 per cent — but remains too high," Mr Bassanese said.

As for the financial markets, they quickly moved to imply a 50 per cent chance of a quarter of a percentage-point hike from the RBA by September, up from 12 per cent before the data was released Wednesday at 11:30am AEST, with a move likely (30 per cent chance) in August depending on the outcome of the full June quarter CPI report, which is due to be reported on July 31.

Of course, a key determinant of whether the Reserve Bank will pull the trigger on another interest rate hike is whether Wednesday's monthly inflation data, the June quarter CPI, and unemployment statistics move the dial in terms of its inflation forecasts out to 2026.

That simply won't be known publicly until the Reserve Bank itself updates the country in due course.