Mortgage rate hikes to blow froth off property bubble

Or, at least, take the froth off the top. Chris Joye with the note:

  • RBA TFF expiry in June lift fixed-rate mortgage rates.
  • Low fixed rates were 40% of all new borrowing.
  • Banks will need to refinance $150-350bn of RBA funding at higher market rates.
  • Housing to remain strong for years.

Quite right, though I suspect the impact might be a little more than CJ reckons on. 100bps on top of your mortgage is not much unless you’ve borrowed to the hilt at 200bps. Then it’s a 50% hike to your repayments and one hell of an income shock.

A lot of folks already with mortgages will have rolled into irresistible fixed terms over the past year as well. As they roll off, repayments will jump higher. This is locked-in progressive tightening for housing and consumption for several years to come.

In my wider base case scenario of Australia being shocked by crashing terms of trade, fiscal tightening, the ongoing China trade war, plus the end of catch-up growth in 2022, you can forget about rate hikes.

The main question is, will APRA be able to tighten at all, or will house prices be used to kick the can again?

David Llewellyn-Smith
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Comments

  1. kannigetMEMBER

    Dont worry, I am sure they will replace the Term Funding Facility with the Perpetual Refunding Facility to allow the banks to roll over the debt continuously…..

  2. If you locked at 4y at sensible LTI levels, then you spend the next 4Y paying that suckah down.

  3. Hex TexasMEMBER

    So which is it ? Interest Rates UP as outlined in the headline, or Interest Rates steady, as in outlined in the summary.

    The other is inflation vs deflation.
    Where i am meant to ignore the rising cost of everything that we pay for, and pretend that all this money printing is resulting in the dollar having more purchasing power rather than less.

    How does housing remain strong for years when the key driver being interest rate cuts is no longer an option ? What is the new magic ingredient ?

    • kannigetMEMBER

      My take is simply that we are in a situation where 3 things are possible.

      1) Inflation will take hold and rates will have to rise resulting in an increase in measured inflation… rinse repeat until we get an engineered hyperinflation scenario.

      2) Things start to become apparent to enough people that stuff isnt improving but the government keeps things propped up, resulting in stagflation…

      3) Same as number 2 but with the government stopping the support and we go into deflation.

      in my opinion we need #1 but if that gets too bad we get a flip into #3 which would be a catastrophy for everyone who borrowed too much and anyone who loaned to them, and anyone who invested in those who loaned, and anyone employed……

      At the moment All stimulus seems to be going into property, once this bubble cant grow any bigger it will start to go into other things. Our biggest risk is imported inflation causing major problems.

    • Jumping jack flash

      “What is the new magic ingredient ?”
      The new magical ingredient was meant to be wage inflation but it looks like Scomo stuffed it up with his Midas touch, except instead of gold, everything he touches turns to the proverbial.

      Hang in there, the US is crying about stagflation as well but i believe they pumped in enough stimulus so it will flow through CPi and turn into wage inflation. What happens here though is another story.

      I am confident that QE4 (or 5 or 6?) will happen and the banks will get their bribes and subsidies to keep the price of their debt low. What else would happen, seriously? Recession? While the so-called adults are in charge? Its not like we have anything else to keep the economy growing except debt growth at this point.

  4. Nah no mate this is Oz the land of house flippers – never going to happen the state sanctioned property protection racket will be maintained and extended cozs who needs anything else when you have iron ore and real estate agents Aussie Aussie Aussie oi oi oi

  5. If rates ever go back to anywhere near their long term average these subprime loans are in real trouble. The government will have no option but to rollout Housekeeper to make sure that the taxpayer can save all these whocouldaknown loans, and of course keep house prices to the moon and the banks afloat.

    • working class hamMEMBER

      “Housekeeper” is what everyone knows will happen. Look at the history, banks will be protected at all costs, with mortgages being their biggest concern, homeowners being saved is just a pleasant coincidence. The way they do it should be interesting.

  6. FUDINTHENUDMEMBER

    Ya can knock the froth off to top. But sure as sh1t.. when a bubble stops going up.. it don’t go sideways for long, it goes down. Best generate another pandemic and ignore another royal commission then..

  7. Jumping jack flash

    Looks like the stimulus is proving to be a fail to restart the debt economy. That means more stimulus, but at what cost? If we stimulate again now we will be punished by the rest of the world. The other alternative is a UBI, a debt subsidy paid to the people instead of to the banks, but the effect is essentially the same because debt is absolutely necessary and everyone has or needs it.