How falling savings could mean Reserve Bank rate hikes may be over

One of Australia's leading economists has forecast a positive spring selling season – in part due to a sharp decline in household savings.

“With savings rates now plummeting, what does this mean for property?” Ray White Chief Economist Nerida Conisbee said.

“With retail trade falling for the third straight quarter, savings rates plummeting and inflation trending down, it is looking more like we are now at peak rates. With more property coming on to the market, this greater certainty about the outlook is likely to make this a much better spring selling season than last year.”


How high savings affected the property market

To understand the connection between savings and the property market, we need to look at the rise and fall of savings over the past three years.

The household saving ratio jumped from 6.8% in the December 2019 quarter to a record 23.6% in the June 2020 quarter, as people cut back on spending during the pandemic. Since then, it's fallen to just 3.7% in the March 2023 quarter – the lowest since 2001.

The high savings ratio during the pandemic had several impacts on property, according to Ms Conisbee.

“Despite Australia seeing negative net migration overseas, rents grew rapidly, increasing by 13% between March 2020 and December 2021. Although difficult to explain at the time, it has since been shown that average household size declined during the time and the number of single person households hit a record high. Rental demand jumped as more people decided they liked living alone more or in smaller households,” she said. 

“It was also a major driver of house price growth. Higher savings rates meant more to spend on other things when restrictions began to ease and it became apparent that the pandemic would at some point end. Extremely low interest rates and lots of saved cash meant strong demand from buyers, pushing up prices across Australia.”


How low savings will affect the property market

Since we emerged from the pandemic, savings rates have declined. That is impacting the property market in different ways, according to Ms Conisbee.

“Rising cost of goods, higher rents and higher mortgage payments are now leading us to dig deep. We are not yet spending more than we earn, as what happened in the Global Financial Crisis. However one more interest rate rise, energy price rises continuing or even a slight rise in unemployment could tip us into negative territory. All of this has implications for where the Reserve Bank of Australia will next move, and by extension, property,” she said.

Partly for that reason, Ms Conisbee predicted the Reserve Bank had come to the end of its rate hiking cycle.

Peak rates, combined with more stock coming onto the market and a more certain outlook, is expected to lead to a much better spring selling season than last year’s, she added.

Published: 29/8/2023