RBA’s ‘nightmare’ warning puts property market on edge

Speaking at the Citi Investment Conference in Sydney, Hauser said the inflation outlook was “materially worse” than the Reserve Bank had forecast in August, with three key risks intensifying ahead of the November board meeting.

With the next interest rate decision less than a fortnight away, Hauser said the board faced “hard choices” as it weighed further tightening against the risk of weakening economic growth and employment.

Hauser warned that inflation expectations were beginning to shift, with a growing share of businesses viewing inflation of between 3 and 3.5 per cent as the new normal, above the RBA’s 2 to 3 per cent target.

“Look, that is the central banker’s nightmare. We can’t allow expectations to shift away from the target,” he said.

A November hike would mark the RBA’s fifth rate rise this year, following increases in February, March, May and September, with the board holding in June and August to assess the impact of its earlier decisions.

Hauser said the same pressures identified at the September meeting were now worsening, with higher oil prices, rising technology costs and persistent domestic capacity constraints threatening to keep inflation elevated.

He said that oil prices were about a third higher than the RBA had assumed in its August forecasts, reflecting the ongoing Middle East crisis and higher refining costs.

The AI and technology boom was also adding to inflation, with Hauser noting that rising prices were feeding into consumer price index figures and that a surge in data centre construction was supporting demand.

Meanwhile, he said inflation had remained at or above expectations despite signs of a cooling labour market.

Additionally, Hauser said prices were rising fastest in areas most exposed to capacity pressures, including market services.

The deteriorating inflation outlook comes as the broader economy shows signs of slowing, with Hauser pointing to weaker-than-expected labour market data, subdued consumption, falling household confidence and a housing market undergoing a “major correction”.

However, he said stronger overseas demand, particularly in Asia, and significant business investment in data centres were providing some support.

“Monetary policy is working. Labour market is easing. Consumption growth is quite tepid. But there are still pockets of growth and the inflation outlook has deteriorated.”

Hauser said the board would need to decide whether to raise rates further to tackle inflation, knowing it could weaken economic activity and employment, or hold rates steady to protect the labour market while risking more persistent inflation.

While the competing pressures leave the door open to further tightening, Hauser said the RBA was still finalising its forecasts ahead of the next meeting.

While Hauser’s comments have heightened the risk of another rate rise, the major banks remain divided on the November decision.

ANZ is forecasting a 0.25 percentage point increase to 4.85 per cent, while Westpac sees the risk leaning towards a November hike.

Commonwealth Bank is maintaining its central forecast of rates remaining on hold, despite acknowledging the rising risk of further tightening, while NAB expects the cash rate to stay at 4.60 per cent.

Property market impact

A fifth rate hike would take the cash rate to 4.85 per cent, a level not seen since late 2008, putting further pressure on borrowing capacity and property market activity.

PRD chief economist Dr Diaswati Mardiasmo said higher borrowing costs could slow buyer demand, moderate price growth and reduce transaction activity.

She said highly leveraged investors and buyers with smaller deposits, particularly first home buyers who entered the market with a 5 per cent deposit, would be most exposed across the market.

“Higher finance costs place pressure on cash flow and reduce purchasing power,” she said.

Mardiasmo said higher rates would also pressure investor activity by increasing borrowing costs, reducing borrowing capacity and squeezing investment cash flows.

“Existing investors may face higher repayment obligations and softer portfolio performance due to weaker property values and market demand,” she said.

However, she said that reduced competition could create opportunities for buyers and investors with sufficient financial capacity.

“A moderation in investor demand could create greater opportunities for owner-occupiers and first home buyers, contributing to a more balanced and sustainable housing market over the long term,” Mardiasmo said.

For investors looking to expand their portfolios, Mardiasmo said that stress-testing cash flows, reviewing higher-risk properties and considering high-yield units and strong regional locations would be key.

“Reduced buyer competition may create acquisition opportunities and stronger negotiation leverage for financially secure investors,” she said.

Additionally, she said a higher-rate environment would require more evidence-based pricing strategies and realistic expectations around current sales, listing volumes and buyer enquiries.

“Negotiations are likely to become more complex, with buyers seeking greater flexibility on price, finance conditions and settlement terms, requiring a focus on maintaining deal momentum,” Mardiasmo said.

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