Australia’s housing market braces for record interest rate rise

Freelance journalist Tarric Brooker has authored an interesting article estimating how forecast interest rate rate rises would compare with Australia’s historical experience.

Rather than examining raw interest rate increases, Brooker has instead calculated the percentage change in mortgage interest repayments from the trough to the peak of the interest rate cycle.

The analysis shows that the 2002-2008 interest rate cycle is currently Australia’s largest, with mortgage interest repayments climbing 58.5% over that cycle:

Relative increase in mortgage interest repayments

2002 to 2008 holds the record for the biggest rise in mortgage interest repayments.

To estimate how the coming cycle will compare, Brooker has measured the impact on mortgage interest repayments that would arise from the Big Four banks’ interest rate forecasts and the futures market, namely:

  • CBA: Cash rate to peak at 1.6%
  • Westpac: Cash rate to peak at 2.25%
  • NAB: Cash rate to peak at 2.6%
  • ANZ: Cash rate to peak at 3%
  • Futures Market: Cash rate to peak at 3.56%

According to Brooker, every interest rate forecast other than the CBA’s would see Australian mortgage interest repayments rise by more than they did in 2002-2008:

Forecast increases in mortgage interest repayments

Most economists forecast a record rise in mortgage interest repayments.

CBA’s forecast rise in the cash rate would slightly undershoot the 2002-2008 rate cycle with a 56.8% increase in average mortgage interest repayments. By contrast, the other forecasts would see mortgage interest repayments increase by record amounts of between 80% (Westpac’s forecast) and 125% (future’s market forecast).

Tarric Brooker concludes with the following salient statement:

Australians have never seen interest repayments on their mortgages rise so much in a single rate rise cycle, making this a truly unprecedented event should any of the big bank scenarios come to pass with the exception of that of the Commonwealth Bank…

Ultimately, tough times may lay ahead for mortgage holders…

I view the CBA’s interest rate forecast as the most realistic for the simple reason that Australians are so indebted and households will struggle to cope with even a 1.6% rise in mortgage rates.

Anything greater risks a house price crash, a severe reduction in household consumption spending, and an unnecessary recession.

Unconventional Economist

Comments

  1. Camden HavenMEMBER

    CB You repeat the mantra but what if nobody cares about how indebted Australia is and it’s banks and it’s governments now are.

    This is war and war costs.

    • The Penske FileMEMBER

      Agree. Debt should cost whatever that market says and not what the RBA or banks think. Why is a recession unnecessary UE? Malinvestments and poor businesses should be flushed out of the system and people with too much debt should be liquidated.

      • Of course, the debt doesn’t go away, it just gets transferred. And as that would eventually be back to the lenders, therein lies the problem. The banks will end up with it all on their balance sheets, and then when they get liquidated – we will, via the traditional taxpayer bailout.
        All this unrepayable ‘free money’ is going to haunt us for decades to come.

          • Ireland. Iceland put bankers in jail and sorted things out. That’s not the Australian way.

          • happy valleyMEMBER

            @footsore

            Indeed – for incompetence and negligence, Strayan bankers receive ever increasing bonuses.

          • Iceland, not Ireland. Australia has its own currency. The RBA allowed the AUD to drop below 50 US cents in 2001, and they would do it again if they thought it necessary.

        • bubbah buddhaMEMBER

          Exactly. This is what Ive been bangin on about Janet. Nobody is talking about the banking sectors exposure….oh no that would never happen HERE!…..as the banking executives ride off into the no-extradition tax haven retirement sunset with their bonuses, while banking enquiries/royal comissions spend millions to come up with the conclusion of ‘systemic failure’.

          • There have been some of us shouting in the wind now for over 18 years about how unsafe Australian banks are.

            Savers will be once again treated as freaks of nature as the rest of the country decides it’s ok to bail in and plunder bank accounts just so their own house prices don’t go belly up.
            Simple truth. Don’t keep your money in Australia if you’re a saver.

        • Muttafukaburrasaurus.MEMBER

          The banks have already been backstopped by the taxpayer.
          TTF repayment starts when exactly?

      • happy valleyMEMBER

        The RBA and its worst-ever governor backbone Phil have debauched the credit markets by QE and the housing markets by ZIRP. Backbone Phil is probably counting down the days to Sep 2023 when his term ends and he can retire to NED land on his enormous pension.

      • How very Austrian of you :), btw I totally agree.
        Firstly how is it that MB does not consider that the RBA do not set the mortgage interest rates, they set the interbank overnight cash rate, the banks no longer source their funds from the RBA (the TFF is closed) lending institutions have to pay the going rate for the 60% they borrow, (roughly 40% being from deposits).
        The reserve bank says most mortgage holders are 2 years ahead on their payments.
        Most borowers have seen massive reductions in their payments over the past 2 years so raising the mortgage rate by 3% takes them back to where they were 2 years ago. What alot of panic about nothing.

  2. What and who is driving the market / futures rate pricing ?
    Is it connected to 10 yr AGBs or some other mechanism ?
    Could they be so far out in their guesstimates ? Thought (true) markets were supposed to be more right more of the time ?
    Is this another fudged / frigged market ?
    What do they lose if they are wrong ? just their shirts or more ?
    and with that spread of estimates, does someone get the arse if they are wrong ?

  3. working class hamMEMBER

    Can the interest rate increases stop before the Fed, without crushing the AUD and compounding inflation?

    • Ah, of course! Except that the Fed non grantum gluteus maximus rodentum about AUD and/or your property investments. Does that answer your dilemma?

    • Yes, the RBA is going to have to follow the Fed pretty closely because in case of real trouble the Fed will be very reluctant in the present situation to deploy swap lines, which were our saviour last time. This means our currency is much more likely to need interest rate support this time around.

      On the other hand the spruikers from the Fed are out now talking much more about tightening financial conditions rather than massive interest rises……they are having no trouble attracting buyers for Treasury paper so the pressure is off and they will run down their ample reserves regime to get their banks to pull their heads in.

      https://twitter.com/aimresearchllc/status/1525172659784491013

      What this means for the RBA will need to wait until after the election but it would take extreme moves in policy to do this before the TFF runs out in the Australian context with ES balances so high.

  4. Speaking to a couple of tradies on the weekend they are seeing further increases in materials next month. A quote for a pergola went from 16k to 22k in 2 months.
    Parents in law runs a bakery, price of wheat keeps going up, no choice but to keep raising prices.
    Doesn’t look like a peak in inflation, not even close

  5. pfh007.comMEMBER

    Interest rates have only been as low as they are due to centralised regulation of the price of bank credit which itself is only possible because Australians are forced to make unsecured investments (deposits) in private banks. Which are then given a publicly supplied guarantee. It makes the old NSW Egg Board look efficient and effective by comparison.

    It would be nice if the “free market” true believers walk the talk and call for reform of our broken privatised model of public money.

    Let everyone open “reserve” zero interest accounts at the RBA.

    Stop flogging a dead horse and end the broken bank monopoly now.

    • ErmingtonPlumbingMEMBER

      Only as long as Citizens can also get their owner occupier home loan from the Govie also at a nominally low interest rate. I’d say 1%.
      No body should be able to access Govie credit at a cheaper rate than citizens working towards home ownership.
      Our culture of Widespread home ownership isn’t/shouldn’t just be a product of the Market. Its a political decision that can easily be made and democratically sanctioned.
      Let the investment property buyers be subject to aggressive market forces without govie support.
      But not citizen families trying to securely shelter themselves.
      Combined with a Just social housing programme this is what I want to vote for.
      I’m certain Millions of Aussies would vote likewise if given the choice.

      • Ermo,

        You can shove your government credit.
        What is really needed is each citizen to be granted their fair share of land and given permission to live on it and permission to build on it. No fancy financial crap is needed.

        • ErmingtonPlumbingMEMBER

          How would the system of deciding who gets to own/live in beautiful Ermo and who gets stuck in the sh!tty Eastern suburbs work?

          • Citizens would be granted land of equal value, or could choose not to take actual land, but instead collect the rent from their share of Australia’s land (and other natural resources that are created by no human). They could then use their share of the rent to rent their share of land, or rent a lesser parcel and pocket the difference.
            So NO, one citizen would not be given valuable land when another is given worthless land.

        • ErmingtonPlumbingMEMBER

          “Why Was the Glass-Steagall Act Repealed?

          The Glass-Steagall Act was repealed in 1999 amid long-standing concern that the limitations it imposed on the banking sector were unhealthy, and that allowing banks to diversify would actually reduce risk”

          Hmmm

          • Muttafukaburrasaurus.MEMBER

            haha….I think that rationale has proven to be 100% inaccurate.
            Fuk’n parasites

    • In the 1960s the Australian Government had export licences for our iron ore. Many nations in Asia, such as Indonesia, have in recent times introduced export licences for their nickel and other resources, as the growth of world trade and the accelerations of export has required the national interest of those countries to be protected.
      “The United Australia Party will introduce a 15%-export licence for all iron ore exports from this country, and will pledge the proceeds from such licences to be used for the retirement of the one trillion-dollar debt mountain that Australia faces.

      https://www.unitedaustraliaparty.org.au/united-australia-party-outlines-economic-plan-for-freedom-and-prosperity/

      • ErmingtonPlumbingMEMBER

        Their 3% home loan cap sounds pretty good too.
        But is anyone here really going to vote for Clive?

        • pfh007.comMEMBER

          Clive’s problem is that no one trusts anything he says.

          Like Pauline, when push comes to shove he will back his mates in Liberal Party and sell out the poor chumps who took him at his word.

          • Yup. Know a friend who voted Clive last time only for all the votes to go to LNP. Was off lnp last election anyway. So now, labour it is.
            Fool me once…

        • Their 3% home loan cap sounds pretty good too

          It sounds appalling. Want to cap 3% on my margin loan for 6% yield shares too?

        • Nothing innovative or new about that and you can’t force banks to lend at that rate; they’ll just reduce their lending.

          • pfh007.comMEMBER

            You don’t need to force the banks to do anything.

            Set up a home lending authority that lends to FHB at 3% for 30 years and have them issue bonds to fund the mortgages which the RBA purchases.

            Not much different to what Fannie Mae and Freddie Mac do in the states.

  6. Great to see and hear you on DFA the other week LVO.

    It would be awesome to see a group discussion between you blokes – DLS, LVO, Tarric – moderated by DFS