February 9, 2023 by Dymphna

Should you wait til the market bottoms out?

The RBA’s not done, but the market is set to turn.

So the RBA hiked rates by another 25 basis points on Tuesday.

That is the ninth hike in a row, and takes the cash rate from 0.15% not all that long ago, to 3.35% today.

That’s 325 basis points in nine months.

That’s wild. If it’s feeling intense it’s because it is. We’ve never had a hiking cycle like it.

So… what? Are we done?

I’d have to think we’re close.

The RBA reckons that inflation has already peaked, and history will show it topping out at 7.8% in the December.

Going forward, inflation will continue to come off, dropping to 4.5% by the year’s end.

But that still won’t be enough to get inflation back in the RBA’s 2-3% target band.

We’re going to have to wait for mid-2025 for that.

And that means, according to Governor Phil Lowe, that rates will still have to go higher, even though it is putting “a painful squeeze” on household budgets.

“The board’s priority is to return inflation to target. High inflation makes life difficult for people and damages the functioning of the economy,” Dr Lowe said in a decidedly hawkish statement following the meeting.

“And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later.” That means “further increases in interest rates will be needed in coming months”.

And he’s not wrong about the painful squeeze on household goolies and budgets. At 3.35 per cent, monthly repayments on a 25-year, $500,000 mortgage will have increased by $908 since May 2022, by $1362 for a $750,000 mortgage, and by $1816 for a $1 million loan, according to comparison website RateCity.

Yep. That sounds painful.

You can see just how sharp the lift in lending rates has been in this chart from CBA:

And I think this does mean that market prices for housing haven’t bottomed out just yet.

Though the CBA made the interesting point that the transmission from rate hikes in to house price falls seems to be much quicker than it used to be:

The historical lags between changes in the cash rate and the impact on home prices have shortened over the past five years. The current RBA tightening cycle is a case in point. The peak in home prices nationally was in April 2022. Dwelling prices began their descent as soon as the RBA commenced normalising the cash rate the following month in May.

Still we’re still hiking. We got another hike this week. There’s a pretty decent chance we’ll get another next month as well.

So that should keep pushing house prices lower.

But at some point – and sooner than most people are expecting – the market will digest those rate hikes, and prices will turn.

On CBA’s forecasts, the current downturn should be the sharpest on record (which is not all that surprising since the run-up was also the sharpest on record.

But in another six months or so – so around August / September – prices should bottom out, and then begin lifting again.

So look, if you’re strategy is simply to time the market and buy the bottom, I’d give it a few months.

But if you’re buying for the long-term, then it’s time to get ready.

Especially if you’re buying your first investment property. It takes first-time investors are surprisingly long time to get all their finances in order and to get ready to buy.

If you haven’t started getting ready to get in, better get on to it quickly.