Mortgage rates begin to edge higher

The latest quarterly data from the Reserve Bank of Australia (RBA) and the Bank for International Settlements (BIS) showed that household and mortgage debt repayments as a ratio of incomes fell to their lowest level in decades, brought about by the collapse in mortgage rates:

The below graphics from CoreLogic, which are current to August 2021, show the dramatic fall in mortgage rates across different loan terms:

Yesterday, Westpac was the latest big four bank to raise its fixed mortgage rates, suggesting we may have passed the bottom of the rate cutting cycle:

[Westpac] announced it would be increasing its two, three, four and five-year fixed rates by 0.10 per cent for new owner-occupied loans paying principal and interest repayments.

That follows in the footsteps of CBA, who hiked its two, three and four-year fixed rates by the same amount last Friday…’s research Director Sally Tindall said the big banks are anticipating lending to become more expensive, despite no early indicators from the Reserve Bank of Australia (RBA).

“While the RBA is insistent the next cash rate hike won’t be until at least 2024, the banks are anticipating an increase to the cost of funding once borders reopen and the economy rebounds,” Ms Tindall said.

“While today’s fixed rate hikes from Westpac are relatively small, people in the queue for a home loan, who didn’t lock in their rate, will understandably be annoyed.”

The latest lending indicator data from the RBA showed that average 3-year fixed mortgage rate ticked up a further 4 basis points to 2.23% in September:

This meant that average 3-year fixed mortgage rates are now tracking 9 basis points above their record low of 2.14% in April 2021.

This may be as good as it gets for borrowers with average mortgage rates likely to drift higher from here, alongside tighter loan eligibility arising from APRA’s macro-prudential mortgage restrictions.

Unconventional Economist
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  1. boomengineeringMEMBER

    The question is which properties will be most affected when these cracks become larger.

    • if your looking at cracks I would suggest most of the highrise and apartment complexes built in the last 5+ years… plenty of cracks in those foundations.

    • Yeah, it could play out as pitched….. or, if you were a hedge fund, could render you insolvent, which by my count, the thesis in question + the constantly shifting Armageddon dates would have done at least 3 times over the last 2 years.

      • Yes, his strike rate would have made you insolvent but if he gets this one right he is orders of magnitude more accurate than Dr Doom, J.Grantham, etc. Does anyone have a link to his latest prediction in full? Maybe he is just a lucky bear in the midst of bunch of big downturns.

    • Even StevenMEMBER

      I think bcnich was predicting sharply higher interest rates. It will happen only if inflation (CPI inflation) moves up to uncomfortable levels. Otherwise RBA will be keen to keep rates low. And they can and will.

      • Nah more about mortgage rates rising regardless of what rba is doing because cost of funds will be rising (bond markets). And rba is now stuck because trying to lower rates will just stoke inflation, so they would be painted into a corner just watching it happen. And expanding the tff or whatever other rubbish will just blow up house prices and wealth effect which bleeds into economy as borrowing against equity to buy other toys.. that increases inflation also. They may not increase rates but it may not be palatable for them to be lowering rates in this environment.
        Plus there was something or rather about the derivatives markets blowing up in the process.
        But no the central part of it did not involve rba raising rates particularly. It did involve mortgage rates going up in some way with rba painted into a corner with something about an external shock hitting at the same time from the derivative markets. That’s what I got.
        Hence my question. This is a case of bond yields and mortgage rates going up while rba holds against a backdrop of inflationary panic elsewhere in the world, but is it actually going to be material?

        • Even StevenMEMBER

          Banks’ funding is driven by a combination of things: deposit rates, long term wholesale funding and the RBA cash rate (short term funding).

          Yes market movements can push bank funding costs higher (causing banks to raise mortgage rates) but if the RBA really wanted to, it could provide unlimited funding to the banks at zero cost.

          In my view the only thing that would stop them doing so is if they believe such actions will push inflation above their target of 2-3%.

          So in essence, as long as RBA continues to think there is spare capacity in the economy they will continue to print.

          That’s it. It’s as simple as that.

          Bcnich’s talk of banks failing etc is categorically wrong.

          • I think we would find the AUD under extreme pressure if that was to occur which would bring a different set of problems. Can they do it yes, but not without cost.

            The CB, regulators and Govt think they can escape this as they believe they’re the smartest in the room but there’s no pain free exit out of this. This country is not healthy.

          • Yeah rippy. They will also not mind currency deflation until they realise we import too much and then get double whammy on inflation.
            NZ raising, BOE raising shortly, u.s. fed under pressure…
            Now July quarter inflation print at 3.8% in Australia. And sure, rba can lend to banks at lower cost, but how to manage the inflation that spits out the other end due to wealth effect? You can’t just keep doing what you did in the last 10 yrs of deflation when now, inflation is showing up…

        • Reus's large MEMBER

          So the bit that will happen is that they will expand the TFF in order to protect the housing market, it is the only thing left for them to do, everything else will be the burden of the populace and they will continue to “look through” inflation as long as there is no wage inflation which will be taken care of via mass immigration.

      • It won’t though. That’s why they want to open the borders. Drive those costs down. As long as people can go on a holiday though right? We can continue to export the inflation which matters overseas using population growth as the way to do it.

        More people = more labor which is the real inflation they DON’T see through unlike everything else where they excuse it as one-off (e.g petrol prices). More people also means houses rise and more people to buy the limited stock.

        More people = lower interest rates higher house prices. What more could a government want?

        • Even StevenMEMBER

          Completely agree, AK. Immigration is a constant deflationary shock which facilitates lower interest rates and higher asset (specifically property) prices. RBA is now a one-trick pony completely reliant on avoiding a property price crash.

          Some commentators have said that our currency will come under pressure if the RBA keeps printing. That will be true if the printing is leading to inflation. But if there’s spare slack in the economy printing may not lead to inflation and instead be productive (MMT devotees!). Ultimately foreign investors want to get the highest REAL return they can (after adjusting for inflation / expected depreciation in currency) . A country with slack should be able to produce supernormal real returns for a period (until it hits capacity limits) and their currency will be seen as attractive.

    • Camden HavenMEMBER

      re-priceing of risk. Essentially a correction in the price must accelerate in either direction, ie lowering in the last 12 years or raising in the future. Bonds from sovereigns might go down but corporates?

  2. Jumping jack flash

    Fixed rates for new mortgages.
    I guess when it starts it starts small. Banks don’t like fixed rate mortgages anyway, so they’ll use any excuse to raise them.

    When variable rates start to rise I will raise an eyebrow.
    I really don’t think that this will happen in earnest until we see some [sustained] wage inflation off the back of general CPI inflation.
    First the price inflation (with unprecedented stimulus), then the wage inflation, then the interest rates.

    It is how it must happen and I’m sure that’s the way they want it to happen, otherwise we will certainly all experience the bcnich scenario. This scenario wouldn’t be really good for the banks and their ilk either – a tapeworm doesn’t live too long inside the carcass of its starved host.

    • How does having a government directly opposed to wage inflation play into this?
      And an opposition who through there immigration policy are gonna put the brakes on any wage inflation quickly enough.
      Inflation lots of it but imported, fuel and food, housing as expensive as ever, inflation in services low but we are running with the worlds most expensive already in labour cost.

    • Even StevenMEMBER

      Agree jumping jack. RBA has been clear they won’t move until inflation is sustainably (and probably above) their target range.

    • working class hamMEMBER

      Aust won’t get the wage increases it needs, the Feds have decided to pump profits instead.
      5 employs earning $40 an hour or 5 wage slaves earning $20 with the boss pocketing the difference doesn’t matter to the Govt. The property market will remain stable with extra warm bodies to backfill dog boxes in CBD’s, with extra IP’s for the top end of town.
      Same amount of cash floating around, just directed towards business interests and mates, with the bonus of setting up an economy which can easily be primed with a narrow band of stimulus in the form of business grants in whatever form is the most palatable on the day.
      Inflation has set in, with price gouging replacing any transitory Covid increases.
      The apocalypse has been averted for some, rising rates and wage suppression will crush the working class and lower income earners, offering fresh opportunities for capital and the greatest wealth transfer this country has ever seen is concreted into place.

      • Camden HavenMEMBER

        agree, however the future is likely not $40 for locals but $20 and $10 for imports. Anyway the model will break as risk is re priced and lending dries up.

    • Even StevenMEMBER

      I’m expecting RBA to initially seek to offset rising rates by exercising yield curve control. Print, baby…

      But because I don’t think there’s much slack in the Australian economy I think we’re going to see inflation and I think RBA will be slow to recognise it / or look through it. So yes, I think our currency is going to come under some pressure.

      However, these inflationary pressures could be offset by massive importation of labour… AND LO AND BEHOLD… What is being talked about? Doubling the immigration rate.