According to interest rate markets, the RBA is about to engineer a house price crash the likes of which Australia has not seen over a century. Via Westpac, here is the outlook for interest rates:
According to rate forwards, Australia and NZ will have the highest cash rates in the developed world at 2% within 14 months, despite having the highest levels of household debt.
You’ll forgive me for saying so but this is rubbish. Neither central bank will want to do it, nor have to.
There are three reasons why.
First, both economies still have immigration as an inflation release valve. As much as I would like to believe that this is not the case, all parties in power or prospectively so, remain committed to a permanent labour supply shock, with some differences around the composition.
Second, if rates move 1% then house prices will be falling fast. The key markets of Sydney and Melbourne are already falling thanks to the end to cheap fixed rates. The fixed rate reset that begins next year on $500bn of new mortgages is a powderkeg. If the cash rate is at 2% by next year then those mortgages will reset at double the interest rate and wipe out everybody that took them out.
Third, global growth and inflation are most likely going to be hit by DM tightening before this can happen. This has already begun in China, which has led the post-COVID cycle from the outset, where growth and inflation have both stalled out.
Markets are hysterical about inflation and interest rates now, especially in the local economies.
