House prices rose strongly in June and this could give the RBA an excuse to raise interest rates again tomorrow. Mind you, they shouldn’t, but it looks like the chorus of economists who are regularly surveyed by the media are now changing their minds, thinking another rate rise is on the way (even if it’s not tomorrow) and that the first rate cut doesn’t come until May next year!

The only good aspect of this bad news is that if we have to wait until the middle of next year for a rate cut, then we won’t have suffered a worrying recession. However, after over three decades of watching and commenting on the Reserve Bank, I don’t see the RBA as reserved! The Governors and their boards overtighten and over-loosen, and I hope I’m wrong when I say the current team managing interest rates is simply guessing what has to be done to get inflation to the desired 2-3% band.

Remember, inflation in June was 5.6%, based on the monthly tracking of the annual CPI reading, down from 6.8% in May. It’s a long way down off the peak of 8.4% in December. This was a big fall before the mortgage cliff kicks in, which is expected to be HUGE in the second half of this year.

If we end up in a recession because of over-tightening, the RBA team will have to be called nincompoops. Obviously, I don’t want them to be wrong, but I think they are. (By the way, the only good thing about them being wrongly excessive with rate rises is that savers, who are scared of the stock market and had to cop 1% term deposit rates) are now getting close to 5%, but if a recession comes, these rates will disappear quick smart.)

So, what’s the latest on house prices from Core Logic?

First, June house prices in Sydney were up 1.7%, which was slower than May’s 1.8% rise. Nationally, the rise was only 1.1%, down from the 1.2% rise last month.

Second, the annual rise in Sydney is now 6.7%, which has made a monkey out of the ‘experts’ who were tipping a 25-30% slump in house prices nationally!

Third, for 2022, Sydney saw a 12.1% fall and Melbourne 8.1%, but Adelaide saw a 10% rise! There aren’t many real house price experts in Australia!

Fourth, auction clearance rates fell by a big 7.5% over the weekend to a still high 71.2%.

Fifth, these gains don’t look sustainable and the trends over the past weekend justify this view.

“I think we will start to see some cracks emerging as the year progresses,” said Core Logic’s Tim Lawless. “I think it would be naive to think that mortgage arrears won’t rise from here.”

Lawless told the AFR that the combination of a weakening economy and so many borrowers being forced off low fixed-rate home loans onto high variable rate loans is bound to be negative for house prices.

Economist Steve Koukoulas told the AFR that rising unemployment is likely to create distressed selling that will add to the supply of homes on the market, which will have a house price effect. “Even a half a per cent or a 1 per cent extra in distressed selling adds quite a lot to the current housing stock,” he told the AFR’s Nila Sweeney. “I don’t think that’s going to cause prices to resume sharp declines like we saw during most of last year. But it’ll be enough to take some of that supply and demand imbalance out of the equation.”

The interesting aspect of this story is that house price falls will be good for reducing inflation, so effectively, one of the main points of the RBA’s rate rises was to kill jobs and bring down house prices. Interest rates are the only weapon the RBA really is using, but when the mortgage cliff kicks in, it will be lenders (banks and non-banks) who will be sticking it to one million households over the second half of this year.

That’s why I think the RBA should stop raising rates right now. The only good thing about excessive rate rises is that the new Governor (if there is one after September) will be able to cut rates sooner than May next year, unless they have the same economic perception problems the current interest rate experts have.