Australia's Housing Market Faces Pressure as Rate Hikes and Credit Tightening Collide

Residential and commercial property prices in Australia could fall if the Reserve Bank of Australia delivers further rate increases, with the cash rate potentially heading towards 5 per cent. This follows the depletion of excess savings in the US, which have shifted from over 10 per cent of GDP to a negative 2 per cent. Australia's economic expansion since 2021 has been powered in part by approximately 500,000 net permanent and long-term arrivals over the 12 months to January, but should population growth slow significantly and savings buffers remain low, the economy could face considerable headwinds. Capital is now rushing out of private markets, reversing the previous flood of money that enabled rolling over problematic loans. This shift will force non-bank lenders to call in loans, potentially leading to defaults and foreclosures, pushing asset prices down. Banks financing some non-bank lenders are under pressure to reduce their private credit exposures, which will tighten credit availability and exacerbate the redemption run. Sustained high oil prices will continue to boost inflation, making central banks more inclined towards globally synchronised tightening cycles.