A generation of home owners wake in fright to rising mortgage rates

It has been 11 years and seven months (November 2010) since the Reserve Bank of Australia (RBA) last lifted the official cash rate (OCR) from 4.50% to 4.75%. Since then, the OCR has has fallen relentlessly to its current record low of just 0.10%:

RBA official cash rate

A generation of falling interest rates.

Therefore, literally a generation of Australian home owners has never experienced an interest rate rise, at the same time as aggregate mortgage debt levels have risen to a record high 142% of household disposable income:

Australian mortgage debt

Record high mortgage debt.

The latest RBA Minutes show that it is preparing to tighten monetary policy if the upcoming CPI data comes in hot. In turn, most economists expect the OCR to begin rising from June.

The prospect of rising mortgage rates has prompted Domain’s chief of research and economics, Dr Nicola Powell, to warn that the post election period will be “extremely difficult for those who had taken out big loans to get into the market”:

“Four or five interest rate rises are being predicted by the end of 2023… That will be extremely confronting for mortgage holders, especially those who are mortgaged to the hilt, like first-home buyers who have really stretched to get into the market”.

Australia’s bank economists expect the RBA to lift the OCR by between 1.15% (CBA) and 2.15% (NAB), whereas the futures market is tipping a jumbo rise in the OCR of nearly 3.5%.

The next chart shows how monthly mortgage repayments on the median priced Australian home would be impacted if rates rose by the low-end (CBA’s) and high-end (futures market’s) forecast:

Projected mortgage repayments

Prepare for mortgage pain.

If the RBA follows the CBA’s low-end forecast, and hikes the OCR to only 1.25%, then this would add 15% ($400 a month) to average mortgage repayments on the median priced Australian home.

But if the futures market is correct and the RBA hikes the OCR by 3.5%, then the median Australian mortgage repayment would soar by 48%, or by around $1280 per month.

Both scenarios assume that increases in the OCR are fully passed on to mortgage holders.

Australia’s growing army of highly indebted mortgage holders will be hoping the CBA’s lower forecast comes to fruition. Otherwise they face enormous increases in mortgage repayments, alongside heavy falls in dwelling values.

Unconventional Economist

Comments

  1. “A generation of savers wake in delight to rising mortgage rates”.

    The glass is half full

    • “Savers” have been making hay on the stockmarket -> they didn’t need high rates on cash savings to finance gigantic gains.

    • kierans777MEMBER

      And surprisingly retirees and others who are on fixed incomes.

      Looking forward to the scare campaign around the RBA and the “homeowner’s tax”.

      • Jumping jack flash

        Yes, retirees will really be the only ones to benefit from rising interest rates.
        They’re probably thinking, “well, its about time. I sold my house [for a gigantic pile of someone else’s debt] and now I was patiently waiting for this day”.

        Because everyone else, including “savers” will be screwed. The savers can only be savers because of their levels of incomes and/or the markets, and those are directly linked to the debt expansion that powers the New Economy.

  2. “The prospect of rising mortgage rates has prompted Domain’s chief of research and economics, Dr Nicola Powell, to warn that the post election period will be “extremely difficult for those who had taken out big loans to get into the market”:

    “Four or five interest rate rises are being predicted by the end of 2023… That will be extremely confronting for mortgage holders, especially those who are mortgaged to the hilt”

    Well, aren’t you supposed to foresee that with your Economics doctorate? Isn’t it better to not have a need to take out big loans? Isn’t it wise to NEVER be mortgaged to the hilt?

    The danger when you have to award doctorates for diversity reasons… rather than merit…..

    • She doesn’t have an economics doctorate.
      although in theory that should make her smarter.

      • She doesn’t have an economics doctorate.

        Hmm, so a diversity hire who doesn’t even meet reasonable selection criteria….

        I was told in never happens.

        • As usual, talking out of your cake hole. Any evidence she’s a “diversity” pick, have you done the smallest bit of research on her past? No, I bet you haven’t. I’d say she has more knowledge to comment on economics than a [email protected] Financial Planner living in 6167 has.

          I wouldn’t have though her job isn’t to protect potential home buyers from drowning themselves in debt, but to provide the best outlook for property, since that’s where Domain makes its money, as possible. Gild the lily, as all vested interests do.

        • Hey Bro,

          If she does I’ll happily apologise, while pointing this out:

          “Hmm, so a diversity hire who doesn’t even meet reasonable selection criteria….”

          I think she’ll take more exception to your post, a sexist post from a fat old white guy!

          • bubbah buddhaMEMBER

            He is reeling you in as usual Dennis.🎣
            Rusty was just pointing out there are now diversity quotas in place and making a remark on it, disagreeable as it might be to you, its a reality he dislikes favouring meritocracy. Y ou disagree but your tone infers his expected hysterical reaction. Why not both debate in a less emotive ivory tower manner

    • Jumping jack flash

      It wouldn’t matter even if she did have an economics doctorate because economics is basically a circle-jerk pseudo science. And the fundamental rules have changed since the banks were put in charge and created their global economic abomination so they could all get rich quick at the expense of everyone else who wasn’t a bank. “Traditional economics” can’t be applied to the debt economy as well as it once could be when the system was actually tilted towards more traditional economics… say, back in the 1800’s.

      • Absolute BeachMEMBER

        Agreed. Economics as a science is up there with reading tea leaves- but that is probably more likely to pick a market correction.

        • They shouldn’t be let off the hook that easily when the SHTF. The kouk constantly craps on about huge personal debt loads being a non issue.

  3. The Travelling PhantomMEMBER

    I think the majority of the population aren’t aware of a near hike in interest rates.
    Why would they be paying 10% above the upper limit of price range?

    • Because rents are absolutely through the roof to at least the same degree. People “trading up” might be crazy if they are stretching themselves in the current market.. people trying to get into the market are more understandable. I would hate to be renting right now.

    • bubbah buddhaMEMBER

      Most of the great unwashed population aren’t aware of(or choose to blindly ignore through greed, and im all right jack) the words …responsible lending, land banking, recession, default, negative equity, indemic corruption and bank bailout.
      The curious and thinking read these sites like MB.
      Whats that Chinese curse about living in interesting times?

  4. Thank goodness the UAP will be elected into power on 21-May and they will limit mortgage rates to less than 3% !!

    • That’s what I thought… I see 1,000’s of household balances sheets every year, they just can’t cop more than 1-1.5%.

      I mean ALL leisure-based discretionary spending will disappear, and it won’t be made up by an extra 1.5% on term deposits.

      My thoughts must be some punters are using institutional money to set the frame, to then use personal money to be the counter party to win up big.

        • Absolute BeachMEMBER

          Yes, but IF inflation is running hot (and it is..) then the CB’s must act now. The punters spending power be eroded with higher prices anyway. Put simply, it must be done. And if the US Reserve acts to a significant degree, then other CB’s will follow to protect against capital flight and damage to exchange rates- which would lead to more imported inflation anyway.
          I totally agree- to be up to the sack in debt is NOT a sound decision, but the RBA is going to make the borrowers take the medicine. Do they have any other choice? Real inflation is way higher than the reported headline number.
          Volker did it- and people hated the guy, but inflation dropped and in the end EVERYBODY got what they need. Price stability.

    • Indeed, no way its going to happen because if it did there would be mass wealth destruction and economic collapse. The snowball wont stop at housing, think 10%+ unemployment as all SME’s with housing as their collateral get taken to the cleaners. Think every large consumer facing business which relies on consumption to drive profit and employment.

      At signs of broad societal distress (wealthy business owners whining) the RBA will intervene with TFF V2 and do a qausi bail out of the consumers and banks. They will need a little bit of pain to be felt but there is no way in hell that the RBA or the Govt of the day will allow photos of mum, dad and the kids being evicted from their home ending up on the front page of a newspaper.

      As a sovereign currency issuer, the RBA can completely control the outcome here, even if it means it destroys the currency. The problem has become too big for them to let it occur. Ideally a slow deflate or stagnant market for 10yrs would be ideal, mass and rapid collapse, they are dreaming.

      • Holiday In ScomodiaMEMBER

        Spot on- reckom TFF V2 plus low (no) hurdle access to super is being organised as we speak…

        • It wasn’t interest rates which took out folks and businesses in the GFC. It was complex investment bank derivatives (CDO’s) structured around BS lending. Now, I fully agree that Australia is full of BS lending but the IB products attached to AU realestate are less complex than the US market and you require an economic collapse and defaults at the consumer level to trigger such an event. I am arguing that the RBA as a currency issuer will pull the handbrake well before mass defaults occur.

      • think 10%+ unemployment as all SME’s with housing as their collateral get taken to the cleaners.

        Isn’t Blackrock the largest owner of residential properties in the US now?

        This doesn’t inspire me with confidence that certain segments will work to prevent it.

        • WEF and the great reset to the rescue, or did you think politician were representing the people!

        • Australia doesn’t have a Wall St and our largest banks are up to their neck in the same product they have flogged incessantly to consumers.

          In the GFC, Fanny May and Freddie Mac collapsed, they were not doing mass property purchases. We don’t have a Blackrock equivalent in Australian finance. Our largest banks don’t want a collapse to happen, it serves them no long term benefit.

  5. borrowing rates are not necessarily assessing rates. What happened to responsible lending practices….thats right..out the door they went. the people on the margins will always suffer.

    • Imagine the tiny mortgages people will qualify for if rates hit 6%, and then are judged with a 2% safety margin…

      • Back to the good old days of 3.5x gross salary
        And … when rates briefly north of 16% on my mortgage it hurt

  6. Quick!

    Without re-reading the article, can you tell me:

    What is the collective noun for highly indebted mortgage holders?

  7. Chatting to a valuer the other day we got talking about the state of all things RE. He said that he worked down south during the recession we had to have and the downturn is seared into his memory. He doesn’t like the current climate and is selling everything that he can now. His reasoning is that he’d rather go now and be wrong and still ahead than hold and get caught out. I’d probably chat to him every two to three months and this is the first time his forecast has shifted from cloudy to storms.

      • I couldn’t say. From what I gather he’s only been up here a few years. He may have decided to keep his old place down south as a rental property when he moved north and that could be what’s been sold up.

        It’s just more anecdata that I thought I’d share.

    • Absolute BeachMEMBER

      Yep. If you saw the damage from the rust belt era of the early 1990’s, you don’t borrow stupid amounts. But folk do.

    • Probably explains why Albo sold his investment property last year. Would love a live ticker on the Parliamentary Register of Interests.

  8. TRADINGtheAPOCALYPSE

    It’s a good thing we suckered in single parents with the 2% deposit guarantee just before IR hikes. Someone’s gotta hold the bag. May as well be them and the taxpayers that underwrite the loans..

  9. Magnus MaximusMEMBER

    Does anybody have an idea of price stickiness in the housing market as in if interest rates jumped 3% tomorrow how long would it take to actually impact prices?

    • The Travelling PhantomMEMBER

      Do you want the boomers to give it away for free (10k less than what they want) ?? No way!

      • Magnus MaximusMEMBER

        Is it too much to hope if investment properties start going underwater the banks will start making margin calls on them

        • MM,

          It’s been many decades since I had an IP, but back then there was no IP equivalent of a stock market margin call, so as long as they meet the repayments they should be fine. I guess that could different if on a fixed IR loan and it comes up for renewal!

          • No, look up the definition of Default in any mortgage contract. The CBA one has under section 9 that if the value of the collateral (property) does not meet the value of the loan, that would be a condition of default.
            And there’s a whole another section about how they would process a default including needing another asset to use as collateral, a one off payment to cover the value etc.

          • Agreed per above, plenty of loan contacts have a broadly worded clause on security value constituting default though in practical terms, enforcing a margin call style policy on resi mortgages would be balance sheet suicide for the banks. As long as the loan is still ‘performing’ you would be crazy to list it as anything other than that on your books, just manage your overall B&D debt provisions instead. They did this during covid with the regulators blessing and to great effect (stimulus not withstanding).

            In fact, it wouldn’t be hard to envisage a scenario where a single bank undertaking a margin call on their entire loan book could/would lead to systemic failure not to mention the political implications of that activity and thus the regulator / govt would likely step in to stop that quick smart.

            Does anyone have any examples of banks actually doing the opposite? GFC, failed mining towns?

        • So I had thoughts along these lines in the GFC ,
          Most mortgages have been packaged and sold with the bank simply servicing the loan.
          So even if you have cash in the bank same size as your mortgage you run the risk of being cherry picked . Your property is marked down hard and the securitization vehicle calls for a top up but … the bank is frozen ( or gone). You can’t top up and you lose both the house and the bank account .
          My solution was to pay off my mortgage

  10. Jumping jack flash

    The entire economy rests on top of this layer of debt foam, only created through debt expansion from systematically lowered interest rates [which was required to keep incomes stagnant while debt expanded].

    It is no secret that interest rates have bottomed out as a result of the banks’ glorious economic paradigm.
    But if they now baulk at incomes rising, which is absolutely necessary to maintain the correct rate of debt expansion, then the obvious effect will be the evaporation of said debt foam.

    The debt foam of course *is* the demand, and likewise the employment positions and wages created from that demand, that everyone presently enjoys.

    • Absolute BeachMEMBER

      Exactly Mr JJF. It’s been a great frothy ride, but then the hangover hits. Rinse and repeat.

    • That’s not what tis is saying, it looks like that window has passed.

      If anything, the reverse credit from households indicates the only ray of sunshine.

      • yeah not saying it anywhere…
        “how cheaply a man of insight can obtain thrills in this fantastic world!”.

  11. Hill Billy 55MEMBER

    As above, the debt foam needs to be increasing for the ponzi to continue. That’s first stall. Secondly, the unwashed need to pay the (wo)man [landlord] and they’re having difficulty. That’s the second stall. The Government is not pouring as much fiscal stimulus into the mix as it has done over the past couple of years. That’s the third stall.
    And on top of that the RBA is lifting rates! I’m sure it’ll end well :).

    • Could have know what? That eventually the stimulus and zero rate party would come to an end and that some form of unwind would need to take place? lol, it would be literally impossible not to find almost daily commentary to that effect since, I don’t know…. 2010?

      The impressive call was getting the timing right which I don’t believe any of the permabears did, in fact, as I have pointed out multiple times, the bcnich hedge fund likely imploded multiple times pre the most recent yield lift off …… whoocoudanode.

      • No he definitely did call that these 2% teaser rate loans were fanciful and in a couple of years, they would not exist at all.

        Easy to poke holes now, but that was a solid call. So was inflation. All documented well on this site.

  12. Never disagreed with those calls, simply pointed out they were not particularly contrarian at the time? Of course they were teaser rates, it was based on temporary RBA intervention? and yes, inflation was a bigger risk than previously as massive fiscal support was now flowing as opposed to just monetary…… The problem was the hyperbolic calls about bank failures and capital market / housing collapse…… The shorting of any of those coming out of covid would have resulted in annihilation and like any bear, you don’t get to simply repeat the forecast over and over and then claim success when it finally plays out in some form.