Highest interest rates in galaxy to pop Australian property bubble

That’s what is still coming according to financial markets. Even as other long-end interest rates around the world have started to decline as markets price in an economic downturn from the paltry tightening we’ve seen to date, Aussie interest rate forwards have held onto all of their gains:

In short, markets are forecasting Australia is headed for the highest interest rates in the developed galaxy by mid-2023.

These interest rates will trigger the following in my view:

  • The bursting of the Australian property price bubble. with prices down 30-50%
  • An AUD back to parity.
  • A deep recession and unemployment soaring above 10%.

It is no wonder that markets have such a terrible forecasting record for Aussie rates because they have NO IDEA what they are pricing today:

It is, in a word, ludicrous.

Houses and Holes

Comments

  1. Bursting bubble = good
    High unemployment = stopping immigration = good
    We all know unemployment numberwang anyway.
    So not really much downside really.

  2. I’d love to see my house down 30-50%. That would mean my kids could buy without my help and we could all get on with our lives.

    Interest rates should never have been dragged this low.

    • “I’d love to see my house down 30-50%.”
      If you had a mortgage, I doubt it.
      The bank might remind you to stump up some cash quickly, in order to remain above the lower equity limit.
      Failing that it’d be up for a sale, 30-50% down on price.

      • Depends on how much principle/deposit you’ve paid. If you only have 5% of your own skin in the game then losing the house and going bankrupt will save you 40% of future repayments.

      • Sorry, but your home loan isn’t a margin load, there is no equity limit to be maintained. As long as you meet the repayments you are fine, not sure what the case is for an IP. Just off the phone to homeloans.com.au, forgot to ask about IP loans!

        • Sounds about right re home loans, cheers.
          Pretty sure most forms of investment loans would require an equity.
          And if another bank takes over (CBA buying Bankwest in 2008), the rules get revised…

          • I seriously doubt change of ownership of a lender can change a contract, my memory is that consumer law doesn’t allow them to do this and while I didn’t ask I doubt an IP loan would be any different. For starters who would decide the “value” of the home? I know on commercial loans banks have written into the contract that they can determine your “equity level” at will (a mate of mine was bankrupted by NAB doing this), but I’m fairly certain not for home lending. I’m not talking lending for commercial property.

        • Home loan contracts have a provision to place the loan in default if the security value falls far enough, maybe not all but I have read a few and they all had similar clauses.

          I doubt the banks would ever do it in practice though (why destroy your own balance sheer) and if they did, there is a good chance get forces would step in to stop it.

          • UpperWestsideMEMBER

            If it’s anything like the USA it will all depend on if your mortgage has been securitized ( or synthetic equivalent), how that was done and what the loan docs had inserted to bump the effective pool rating

    • DingwallMEMBER

      The bursting of the Australian property price bubble. with prices down 30-50%
      Yes f*#king please!!

    • It’s surprising how many people fail to realise that. Most offspring would be in the 40s or older before they inherit as well, somewhat late in the help department.

      • Yes, I wish more was made of the so-called wealth effect from housing actually being a trap. A societal cancer!

      • chris brookmyre

        In their forties? Neither of my (long-divorced) parents inherited anything from their parents until they were in their seventies!

        I’m expecting to be at least that old if not older before I inherit, if there is even anything left by then…

    • Ivan, In my situation my kids have bought starter properties but they are not in a position to buy a median priced house with a decent backyard. I would dearly love to see properties come back at least 30%.

      • Way too much focus and pressure on young people now to invest in property and lumber themselves with colossal debts. At the same time employment less and less stable.

    • TheLambKingMEMBER

      I’d love to see my house down 30-50%. That would mean my kids could buy without my help and we could all get on with our lives.

      I keep reminding people of what happened in the UK in the GFC – the house prices were down 30-50%. But no bank was lending money. The banks were not leanding money because house prices were falling and they didn’t want to give loans with negative equity – so you needed 50-60% of the value of the property. Which meant house prices dropped further.

      • There’s no one size fits all solution, I know. But if this madness doesn’t stop, I don’t even want to think about the future.

  3. Blackstone and other international investors will buy up all the RE and become the nations land lord ….

      • Hay its just what happened in the U.S. and now one can see the huge change in the German RE market. Seems like many have completely forgotten how the largest transfer of wealth in modernity occurred post GFC in the U.S. but some are still keen on pushing it on everyone else as best practices. Not to mention the whole strange and troublesome psychological notion of let it burn so the utopia can be rung in thingy … I mean unless you want capital to have more control and power …

      • LOLs
        (Skip, I mean BC is probably right, though if a major worldwide crash hopefully they’ll have lots of better investment optoons when BTFD)

        • How did that 50 State Ag group work out for all the mopes fraud was committed against by the financial sector Zulu – ?????

    • Did you make that up or get the BS from somewhere else? Residential property is one of the worst yielding investments and requires a lot of management. – certainly not well suited to corporate objectives

      • Leroy Huggins

        If you have not witnessed how much certain modern organisations are prepared to ‘lose’ pursuing goals that are quite separate to financial ones, I am not sure where you have been. And also note, when total collapse happen, the only thing that counts is holding items that are physical in nature. “Don’t lose everything”, is a different strategy to “make as much as possible”, but still a financial one.

      • Single homes not some much, but units, townhomes etc. is big business in the US, 43 million of them roughly with many of the major property players involved in their ownership. and yes, Blackstone is one that bought up tens of thousands of stand alone homes in the GFC.

        I was in a briefing with a GREIT manager just last week, talking through US inflation and the impact on a few trust holdings. No problem for the group they have purchased apparently, they are pushing through quarterly…yes quarterly CPI adjustments to their 7000 resi tennants….

        probably why this is happening even back in 2019!
        https://www.theguardian.com/us-news/2019/mar/26/blackstone-group-accused-global-housing-crisis-un

        and from Feb this year:
        “America’s Largest Landlord Just Got Even Bigger: Blackstone Buys 12,000 Sunbelt Apartments For $5.8 Billion”

        So no, they are not making it up.

      • UpperWestsideMEMBER

        Small managers make their money by managing assets.
        Big ones are simply asset gatherers.

        Long term we small guys get paid on performance
        The big guys don’t give a rats about performance as long as the assets stick and pay management fee

        Sadly the big guys raise an ever increasing percentage of investable assets pool

  4. Now that we are where we are with interest rate, was there really any justification for RBA cash rate of .1?
    Imagine if rates had only lowered to 1 or 1.5? What would that have meant?

    • UpperWestsideMEMBER

      ScoMo is giving his defeat speech as I type
      He doesn’t look completely shattered by losing
      Labour has drunk from the poisoned chalice

  5. When we say “financial markets” who are the main players expecting such rates? Investment firms?

    • Tassie TomMEMBER

      Banks, life insurance companies, aged care facilities, pension funds, superannuation funds (including my SMSF).

      Every time you take out a fixed interest loan, effectively you are buying a bond. Every time a bank writes a loan, effectively they are selling a bond. And that includes banks lending to each other.

  6. C.M.BurnsMEMBER

    As the strategist for the MB fund, what happens if you’re wrong Dave ? What happens if you’re even half wrong ? Or a quarter wrong ?

    What is the MB funds’ hedge against you (and Leith) being wholly or partially wrong ?

    Cause you have been entirely on the wrong side of the inflation call thus far.

    • Camden HavenMEMBER

      And the bond fowards can be differentiated to the overnight rate. So what if both are correct?

  7. Quite a conundrum we are in isn’t it. ?…….will this inflation drop off in the presence of long term supply constraints ? It really is a geo-political problem even after the Fed knocks the complacency out of these market makers.

    Russia has no interest in selling its resources to unfriendly countries any more except at high prices in situations where it controls the bezzle. And increasingly it looks like China is keeping its head down and preparing for war while attention is elsewhere……..don’t expect the sinews of the green revolution to be available at knockdown prices from them any more even when you can get them due to continuing supply interruptions.

    Geo-politics could trump the financialised economies of the west here and force a reshoring of productive capacity even in the presence of resource constraints in the west that didn’t exist in the 70’s. In that case there could well be long course of gradual interest rate increases ahead of us lasting a decade as capital will need to be attracted as well as resources that Australia and Canada don’t have will have to be paid for all the time.

    https://twitter.com/DiMartinoBooth/status/1527397373655277569

  8. happy valleyMEMBER

    “The bursting of the Australian property price bubble. with prices down 30-50%”

    And which of Straya’s big 4 banks will be the first to go belly up?

    • Leroy Huggins

      They won’t, unless the powers that be want to take them down. If they want them to survive they will just be directly re-capitalised at the public’s expense, with as little given back to the public (up to zero) in return. If they want to, they would just tell you it is for your own benefit, and just like the vast majority accepted that mass immigration was (or enough to allow them to just do want they want regardless of public sentiment), they’ll accept this too.

      I don’t know why people fail to understand these things. Good governance is impossible without good media, which requires a WHOLE lot of conditions and a certain environment present to be “good”. And this goes for both public and private broadcasters.
      Conditions that have not been present for 6 decades or more.

      With bad media, the public will do what ever it is told. Accept anything it is told. You only get a say on the things the media itself is split over, and when it comes to sticking up for *not you*, and *you*, it is ALWAYS *not you* on any matter that counts.

    • Camden HavenMEMBER

      The interest rate fowards are high because they factor the need to support the AUD

      • It’s not about strength of Oz dollar, it’s about weakness of other currencies.

  9. One trick ponyMEMBER

    It’s about time we had a robust discussion on the future direction of oz interest rates on here…