Canberra home buyer says interest rate rise was 'inevitable' as RBA credibility is called into question

Despite RBA governor Philip Lowe last year saying the bank would not raise the cash rate before 2024, the central bank has now made three consecutive increases, taking the official cash rate to 1.35 per cent.

Criticism of the governor's incorrect forecast has been mounting since the central bank's latest announcement on Tuesday.

Following the forecasting error, Dr John Hawkins, senior lecturer at the Canberra School of Politics, Economics and Society, said he expected future statements on interest rate rises would be "greeted more sceptically" by consumers.

"The governor has admitted it was a bad forecasting error and it has probably reduced the credibility of the bank's forecasts," he said.

"The bank is reviewing the experience to see what lessons they can learn. In addition, the Treasurer is establishing a review of the Reserve Bank and this could well be one thing they look at."

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But Dr Hawkins said the governor's forecast was misreported as a promise.

"The bank said they would not increase interest rates until inflation was sustainably back within the 2 to 3 per cent range, and initially they did not think this would be until 2024. But it was often reported as though they would keep the cash rate target at 0.1 per cent until 2024 no matter what," he said.

A faster-than-expected rise in inflation, supply chain issues, increased consumer spending, a global spike in oil prices and numerous floods in Australia were all factors to be considered, Dr Hawkins said.

"The bank always said they would respond with higher interest rates once inflation picked up, but they were not expecting it so soon," he said.

Melbourne-based buyers' agent Cate Bakos said while the RBA got its forecast wrong, she doesn't believe the governor's statement was a key driver for buyers to borrow more.

She said buyers who extended themselves in the peak of property growth last year likely did so in a "desperate attempt to secure their home in a sea of competing other buyers".

"Whether the rates were to rise in 2022, 2024, or any other year was not really of much relevance to any buyer taking out a 30-year loan term," she said.

"I think the more pressing issue that buyers were concerned about was the strength of the market and the fact that the high capital growth rate was directly linked to record-low interest rates.

"Buyers who gave this consideration would have held grave fears about the property market continuing to soar in response to record-low rates. They may have pressed on with a strong sense of FOMO in an effort to buy sooner rather than later."

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Ms Bakos said the real message for buyers was to recognise economic shocks are often unforeseen.

"We can feel as frustrated as we like about the RBA's nonchalance, but buyers should also focus on the APRA-initiated buffer rates applied to loan assessments. Buffer rates are in place for this very reason," she said.

In October, the banking regulator announced stricter a mortgage serviceability test, requiring borrowers to show they can meet repayments even if rates rose by 3 per cent or more.

"Anyone who assumed that a 0.1 per cent cash rate was sustainable long term was naive," Ms Bakos said.

"Our governor did get the timing wrong, but blind Freddy knew that rates would eventually go up."

Jonathan Naef recently purchased an investment property in Queanbeyan with his brother and said he considered interest rate rises "inevitable".

"[Rates] have been so low for so long, that you sort of go well, it's inevitable that they're going to go up at some point. I sort of see it as ... being able to get finance, interest is going to be a part of that," he said.

Mr Naef said the RBA's forecast last year wasn't a major consideration in his decision to purchase.

"I guess when I hear those sorts of things, there's always a little bit of an element of telling the people what they want to hear," he said.

"... they may genuinely have thought that at that time but they don't have a crystal ball, like we don't."

He compared the rate forecast to those who predicted a property market downturn at the onset of the COVID-19 pandemic.

"Before COVID they were thinking that the property market was going to go down and then it ended up, in Canberra, that the market just went insane and property prices went up considerably," he said.

Mortgage Choice Manuka owner and director Matthew Hayes said while most buyers were expecting rate rises, they happened sooner than anticipated.

"I think everyone had it in their mind that they were going to go up regardless [but] I don't think they expected it to go up this quickly and by this much," he said.

Mr Hayes said buyer activity in Canberra has remained steady, despite the three rate rises. He said Canberra's high median income has helped to buffer the rate increases.

"People have the capacity to absorb the interest rate rises and I think that from what we've seen over the last six to eight weeks since these rates have come in, it hasn't slowed down the market, especially the first home buyer market," he said.

Mr Naef said he had mixed feelings about whether future interest rate rises would have a significant impact on his lifestyle.

"Yes, of course, I'm conscious of the potential for interest rates to rise and that's one of the things that I think it's important to seek appropriate advice about ... and not necessarily just looking at what the interest rate is as a percentage but what the repayments are as dollar value and comparing that to your budget," he said.

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