The floor continues to fall out from under the mortgage market, especially with respect to fixed rates.
Since the beginning of the COVID-19 pandemic, fixed mortgage rates have experienced much bigger declines than variable mortgage rates, providing borrowers with opportunities to make big savings on their repayments.
As shown below, the average rate applying to existing 3-year fixed owner-occupied mortgages was only 2.19% as at February 2020, 1.46% below the average discount mortgage rate on existing owner-occupied variable mortgages:
Fixed mortgage rates cratered 1.46% below variable mortgage rates in February 2021.
The rates on new fixed mortgages are even lower.
According to the RBA, a typical new owner-occupier borrower in January could obtain a fixed rate mortgage at just 2.1% if they chose a term of less than 3-years, or just 2.0% if they went for a term over 3-years:
Rates on new fixed term mortgages have plummeted to around 2%.
Amazingly, mortgage rates continue to fall with Westpac yesterday cutting its two and three-year fixed mortgage rates by up to 20 basis points:
Its two-year fixed owner-occupier loan now garners a rate of 1.79 per cent – the lowest on offer within the product category.
Westpac’s three-year fixed rate now sits at 1.88 per cent, while its four-year fixed is at 1.89 per cent.
Mortgage rate cuts have been implemented across the Westpac banking group, which includes St George, Bank of Melbourne and BankSA.
RateCity’s Sally Tindall believes mortgage rates will fall even further, stating “it’s likely there’ll be more cuts in the weeks to come as banks compete for the record levels of new lending coming through the door”.
Who knows how low mortgage rates could go? The RBA could always follow Europe’s lead and drop the rate on its Term Funding Facility (TFF) into negative from 0.1% currently. This could send fixed mortgage rates to around 1% or lower.
In an age of quantitative easing, the old rules no longer apply.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
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In mid-June, RBA Governor Phil Lowe stated that
The rubber between short term and long term bond rates will stretch ever wider while the rba props up short term bonds whilst the market continues to drop the long end bond prices.
The bigger the stretch, the more aggressive the brrrr needed to keep the short end anchored.
Rubber band snaps when us fed forced to taper QE due to rampant price inflation. Other countries forced to taper to preserve their exchange rate.
The RBA happy clappies will continue after the band has snapped, until the RBA plunges over the cliff. The RBA clappies have some new toys to play with now and they are not going to stop until they are all broken.
CV
I think opposite is possible , think the gap is going to really narrow 10 year government bond rate fell from 1.80% to 1.68% but think the 10 year will possibly come down to 1% so the gap narrows with lower fixed rates before interest rates really start rising, If this happens you’ll see fixed rates even lower first …..before rates up
Rates are going much higher but moves aren’t in 1 direction……
“Rubber band snaps when us fed forced to taper QE due to rampant price inflation.”
Price inflation is actually the plan.
CPI has been suppressed due to ancient political policy that has inexplicably been carried through until today, well at least until 2019. My opinion is our great leaders haven’t had an original thought since 2006, nor do they need to ever again since the running of the economy was outsourced to the banks.
CPI was suppressed due to the spectre of rising interest rates back in 2006 when we actually had inflation, but we don’t have inflation now, we have counter-deflationary measures. And anyway, interest rates have been successfully decoupled from CPI (thanks, GFC) and interest rate increases aren’t going to happen now until at least 2024 so, let ‘er rip.
CPI is incredibly necessary for wage inflation. Which business is going to pay wage increases out of current profits? None. They will raise prices to obtain additional income to pay wage increases with. Current business revenue that is earmarked for wages is already spoken for, and it is locked in to service existing personal debts, which everyone has. Hands up all employees who would like a pay cut so the 3rd world slaves can get a few dollars an hour more?
The problem was that due to wage theft (and the “quest for debt”) demand cratered, and businesses couldn’t raise prices (unless they were providing essential goods and services of course), so that also meant that wages couldn’t rise.
Minimum wages and dole will rise everywhere.
Wages will increase, but buying power barely.
The higher nominal wages deflate the work hours needed to pay off pre existing debt.
It’s pretty crazy. Spend a week looking and comparing – apply – a week later you see 20bps shaved off a range of product. But then, picking the bottom is for pros. Surely they can’t get much lower . The banks must be printing off the NIM between the TFF and prevailing rates
*slowly walks a schooner of stone and woods finest over to happy valley who is a blubbering mess in the corner*
Slowly walks doing the wrong thing and so did I do the wrong thing this morn, past a small motorbike down N Head hill on the other side of the road island as she took up the middle of the lane.
Bit like the RBA, more dangerous, but nowhere else to go except slam the brakes on and take the consequences.
Par velo?
My R5 is still sitting lonely in the shed for 4 weeks. Haven’t had a chance to strip the SS evo yet . It’s all very sad
AUST 10 year bond dropped from 1,80 to 1.68, everyone is now banking on higher interest rates, but they’ll come down maybe to 1% on the Aussie 10 year that’ll push fixed rates even lower …….before the big move up in interest rates
If that happens, prices are going to 🚀
If it plays out, this is the TRUE BLOW OFF TOP of the bubble
It’ll let you work out what the phase is after that
Hey bcnich,
You keep saying rates will back up and cause a crash in the 2nd half, but you haven’t really explained why the following levers could not be pulled to further extend and pretend for another 18 months™ or more:
– bring interest rates for investors down to parity with OOs;
– take rates -ve;
– removal of stamp duty;
– introduce 50 year loan terms;
– reintroduce interest only loan terms for 5 years or more, nearly halving minimum monthly mortgage repayments;
– allowing interest deduction on PPOR;
– allow early access to super for housing;
Etc etc
Some or all of these levers could be pulled to easily kick the can for years more. Without addressing these your doomsday cries are just not credible.
Lock interest rate deduction on PPOR OO for $100 Eddie!
Yes Usman you are absolutely correct ……I believe they will want do all these things, but this “meltdown” financial crisis, is going to happen so quickly that they won’t have time.
I (Think), that Aust 10 year bond rate will retrace… back to 1% from now 1.70% over next 2 months…..if that plays out it going to send everything into the stratosphere…..
This is called the “Blow Off Top”. This happened in 1999 when Nasdaq broke extreme resistance went for 2 more years………Let’s just see what happens over next few months…..
If this plays out you are going to see “parabolic moves up” that we will never see again in our life time…….watch S&P 500 if it breaks 4,000 and we do get a very strong counter trend rally in bonds US 10 year back to 1% and Aust 10 year back to 1% too.
You’ll see fixed rate home loans come down even further….maybe 1.5% ??
If it plays out property prices will go through the roof, BTC maybe 100,000, Nasdaq ASX everything go vertical up
Can we just see how the next 3 or so months go into June 30 because if this does blow off in “vertical markets” I think that it’s way too out of hand (I think this bubble it already has) but bubbles can go on much much longer.
We have never seen the amount of stimulus Governments and Central banks have injected into the economy…..I think both combined 10 Trillion, correct me if wrong, World GDP is $70 Trillion so it’s something we have never seen in history
The next 3 or 4 months will give us an idea. We need to let things play out for a bit.
If we get to that point You cannot use any sensible valuation methodology need, if we keep going, this is being fuelled by human emotion, FOMO, Greed, Insanity etc.
PS 6 months
If DXY falls lower and breaks down under 2020 lows of 89.30, it will fuel this even further.
Also I over laid Oil and US 10 year yield on a chart and since election they are moving together so if Gov yields fall so will oil here ….oil might be the one that doesn’t rise if this plays out
I read from a really good source that FED doesn’t look at CPI, they look at inflation expectations & CRB index which are both very correlated. If you want to watch inflation exceptions, keep an eye on RINF ETF
+1
Hey Bcnich, what are your thoughts on gold & gold stocks under the scenario you laid out?
Gold has been under a lot of pressure over the last 6 months & gold stock too. Gold seems universally despised in these crazy times, debt out of nothing & imaginary numbers with little utility are all the rage.
I don’t know whether to expect a golden moon-shot, or panic into cash as everything collapses.
Every single forecast is really based off direction of US 10 year yield
Gold is very highly correlated to real yield
Gold(USD) topped out in AUG exactly when US 10 year starting rising
Get a chart us 10 yr over laid gold inverse
But even more real yields (nominal 10 year less inflation)
I use inflation expectations not CPI but what ever you think is the best measure
Guess what’s your view on US 10 yr
My feeling gold is a little over sold but I understand everyone hates gold now, not sure why but that’s the way it is
Really have to get the direction of interest rates correct here over next few months that’ll probably driver USD, IF US 10 year falls think dollar probably too
Think we get a correction lower in US 10 year yield
I think US 10 year has run a bit too hard up and gold maybe a little oversold in 1600s
I really like gold very long term so I really don’t look at it day to day
anyway that’s what I think I’m guessing like everyone else so I’m hesitant to say because I cop a barrage from everyone, everything is very hard, feels like betting on derby day
You asked in the global crisis in H2, gold is going down with everything else just have a look at what happened in GFC
It’s not a safe haven, it’s a commodity with some safe haven ,,,
Probably go down less in USD than other risk assets
I only look in USD, not sure about AUD, I’m sure AUD is going down with everything else
Just to clarify I think interest rates are going much higher longer term just not now
Thanks for your thoughts, its appreciated.
Rates can stay much lower than most imagine.
We are talking about a private bank cartel operated / managed / supported by the state (but not democracy) which is now finely tuned to make sure money creation is directed to making asset owners wealthy.
Inflation rising and rising interest rates are NOT a significant risk while.
1. The government opens the door to loads of labour competition…only months away
2. Exports are supporting the value of the AUD……thank you communist China….our wealthy middle class salutes you.
This is how our monetary system now works.
If you think it sucks then you need to demand reform and that means ending the banker monopoly on RBA deposit accounts.
Of the Mates, for the Mates.
Correct.
Rates are simply the price of debt.
Economies of scale apply for debt, as with any other commodity.
It is conceivable that with enough subsidies that debt could be sold below cost.
In an economy where the main product produced is debt, it makes perfect sense for subsidies to be applied.
Yeah. Boom times.
How’s sun boy going?
LOLOLOL
Indeed!
https://www.greaterfool.ca/
canucks.. houses.. moon
Good to see that they are also having great boom times!
The lower they go the more they can lend…. in theory
The more they lend the richer they get.
It is not a problem for the banks.
Their system is already constructed so issuing new debt repays the old debt plus the interest. There is no risk. They control their own destinies at the most basic level. The only unknown is the speed of debt keeps up with the interest.
At the moment interest is so low, that a snail’s pace of debt growth would be enough to keep up.
Big4 were focused on 4yr fixed special rates. These now have to end, hence the pivot to the QE backed 2 and 3yr durations. The 4yr fixed specials sub 2pc will cease to exist before end of month.
My interaction with a non-Big 4 lender yesterday was summarised as:
“how much would you like to borrow?”
“as much as you will lend me, then hopefully another $200k”
If the economy is going to tank, I plan on living in luxury until it does.
That 200k will naturally go into meme stocks or bitcoin, non?
……..so they gave you +$400K?
It is like this with personal loans at the moment. Demand has fallen off a cliff so they’re eager to lend as much as they can.
I took out a personal loan for 5k with a big 4 bank a couple of months ago and they tried to push it to 12k. I had to refuse a number of times.
With employers calling people back to the office, it’ll be interesting to see how the rural/coastal markets evolve.
When people get sick of the commute they might need to stump up for a city apartment.
Had a good look at Southbank, Vic the other day. Couldn’t really see price carnage in the apartment market, so perhaps they’re already vacuuming them up?
Lol @ libs getting only 2 seats in WA
https://twitter.com/ErmoPlumber/status/1370717251989467138?s=20