Insane markets double down to torch Australian house prices

The latest forecast from futures markets is now tipping that Australia’s official cash rate (OCR) will hit 2.8% by December before peaking at 3.5% by July 2023:

Future's market cash rate forecast

Australia’s cash rate to hit 2.8% by December 2022.

That would represent the equivalent of around ten 0.25% hikes in the cash rate over the next seven months, followed by another three hikes over 2023. It would also represent the sharpest pace of rate hikes since 1989, as illustrated in the next chart:

RBA cash rate

Markets are tipping one of the sharpest interest rate shocks in history.

AMP senior economist, Diana Mousina, said that “based on market pricing, Sydney and Melbourne could fall by 20%”, and believes “there is potential for steep falls in these markets because the run-up in prices was larger and households in these two cities are also a lot more under leverage”.

However, she cautioned that the RBA would be unlikely to hike rates so aggressively because it could collapse the financial system – a view supported by UBS chief economist George Tharenou:

“We expect the RBA hiking cycle to get stopped out earlier than most, and far below market pricing, as we think the latter would likely crash the housing market and cause a recession”.

Regular readers know that I view the futures market’s interest rate projections as stark raving mad given they would lift average mortgage repayments by 37% by the end of the year and by 47% by mid-2023, versus what they were at the beginning of April prior to the RBA’s 0.25% rate rise:

Australian mortgage repayments

Australian mortgage repayments would surge.

On the median priced Australian home, this would equate to a whopping $976 increase in monthly mortgage repayments by December, and a $1,252 increase in monthly repayments by mid next year.

Obviously, such a massive jump in mortgage repayments would cause a sharp fall in buyer demand, plunging house prices, and a likely recession as consumption spending collapses.

Be thankful the interest rate lever is with the RBA, not the crazy futures markets.

Unconventional Economist

Comments

  1. So, the markets are insane, eh? But not the Australian house prices?
    “Be thankful the interest rate lever is with the RBA”
    Sure, backbone Phil’s fanboi.

  2. One trick ponyMEMBER

    Still agree with MB on this – expectation curve is way too aggressive IMO (at least in oz). Have actually done something about it in recent days and bought some long duration (domestic). Should only be a few months (possibly sooner) before this is either shown to be a good trade, or the futures market is shown to have been right all along.

  3. pfh007.comMEMBER

    Those markets may be saner than we think.

    There is a good chance the markets are watching the Fed because if the Fed decides it needs to hike it will hike regardless of what that might mean for the “equity mate” discussions around a burnt snag in the badlands of Sydney and Melbourne.

    And as much we fancy ourselves as exceptional there is no chance that the RBA is going to allow the Fed rates get too far away from local rates.

    Yes, this may mean lots of wailing amongst our middle class asset owners who believe that sitting on their butt speculating on asset prices is better than working for a living but SO WHAT.

    There are plenty of alternative ways of getting money into wallets on main street that do not involve fluffing the prices of already over inflated assets and relying on absurdities like the “wealth effect”….it should be the “wealth defect”.

    Yes those alternatives involve some reforms but again SO WHAT.

    That is exactly what happens when the comfortable status quo finds a rocket shooting towards its hind quarters.

    • Absolute BeachMEMBER

      +1. If the RBA fails to act in roughly parity with the Fed, the AUD$ is toast. It’s a negative feedback loop – stuff we import goes up and so inflation gets worse. It’s bad enough already breaking .70c. If Powell waivers, he is killing the bottom 90%. The top 10% will survive. If he stands firm, he is gets to be remembered like Volker. I’d hold my ground.

    • Jumping jack flash

      And this is exactly what i meant when i said that Scomo had bungled the stimulus. The point of the stimulus was very obvious and it had little to do with COVID.

      When the US stimulates like they did thats a pretty clear sign that stimulation is required. Scomo and all his advisors couldn’t see that and now we have to struggle through this inflation plus interest rate rises with no cushion of rising wages on the back of unprecedented stimulus spending because there simply wasnt any.

  4. LVO
    RBA won’t lift much above 1% but it won’t stop property tipping over. We are on the v edge & it’s not going to take much to tip the Aust economy & the banks over

    • happy valleyMEMBER

      Backbone Phil’s term comes up in September 2023 – so, he’ll just want to cruise until then and thus your 1% gambit will see him out.

    • So the call is:
      – The RBA will be stopped out just north of 1% cash rate, presumably with the market continuing to price longer maturities more aggressively.
      – This will be sufficient to crush local demand, though wont really impact supply side CPI issues and thus markets will continue to price longer maturities more aggressively.
      – This demand destruction tight credit conditions (access and cost) will precipitate a fall in GDP, asset prices, income & employment that will result in a major rerate of asset prices, particularly housing, significant enough that bank nationalisation isn’t just possible but probable.

      Have I got that roughly right?

    • Is this because banks will have to lift mortgage rates outside of rba rate rises?? As, more makes up the mortgage rate than rba cash rate?
      And then everything someone above said.

    • bcnich yes I agree. By the time RBA gets to 1% the excess tightness in monetary conditions that MB has been showing in its charts should have caused the Fed to back off.

      • and I have to add that MB has been doing a nice job in calling out a prospective global recession from the multiple concurrent supply shocks plus Fed over-tightening.

    • BoomToBustMEMBER

      (I agree with much you say) so I’m curious what would happen with interest rates if rates in the US keep going up, wouldn’t this cause the AUD to tank further this driving up inflation even more?

  5. The housing market wouldn’t be insane if interest rates were always set by the market and not the RBA. Therefore, in that scenario the futures would not be looking insane like they are now. Interest rate manipulation by the RBA and Fed is the reason things are so fvcked right now and why everything is mispriced.

    • Jumping jack flash

      This.
      As soon as they decided to choose the path of interest rate manipulation they pretty much sealed this fate. When Bush asked Greenspan to fix the dotcom crash and stop the 9/11 effect, he chose the easy path.

      The only way out of their downward death spiral would have been to raise interest rates and force the recession we needed to have much earlier, say, 2002 but the Iraq war was roaring along, not a good time for a recession. Now 20 years later and there’s thousands of trillions of debt dollars existing that shouldnt have ever existed. That colossal volume of debt created from their ill-fated decision *is* the economy now. The Debt Economy.

  6. DingwallMEMBER

    … and bloody hell, the honey pot just can’t keep going on forever…… burn it down and create a decent economy not based on a one trick pony

  7. LVO, where is the latest westpac expectations chart (can’t be bothered plotting the data myself).We have to be close now to the most aggressive market in both rate of change and terminal cash values?

  8. Hill Billy 55MEMBER

    Low interest rates are dead in the water.

    The unquestionably sound Australian Banks have $AU300 Bill from the Reserve Bank via the TFF at .1%, ending 30 June next year. Even with that largess, the said Banks have had depressed Net Interest Margin (NIM) over the past year. They are also squashing the rates paid on ordinary consumer deposits. Ergo, the professionals are already demanding increased rates.

    • Hill Billy 55MEMBER

      Secondly, inflation will linger for longer. This will have a material affect on the ability of people to borrow. As Steve Keen says, change in credit is the crucial variable, and if the credit spiggots are turned down or off, there goes house prices.

      Therefore the interest rates from the Fed will go higher, and stay there. So the RBA of necessity will have to raise rates substantially. See already the divergence in rates is depressing the AUD. At some point, the RBA will be awoken from their slumber. May be even next month we will see a .4 move up.

        • Hill Billy 55MEMBER

          It’s funny alright. These old blokes, including myself, occasionally say something sensible. The problem is it takes waiting a while to find out which thing was sensible. Meanwhile life goes on and decisions have to be made.

  9. Goldstandard1MEMBER

    What the Fark Leith? You backing the system, the RBA insanity and debt levels now? Can you at least ackowledge that it needs to burn so the economy doesn’t literally rely on ever rising house prices? You’ve gone full retard now.

    PS. Thanks for running the site though, so we can have these discussions! I added that in case you have 6 beers and ban me for calling you full retard…..

    • In case you haven’t noticed, whenever something/someone threatened to lower property prices,
      MB (both of them) went about face and tried to undermine it. From the first home buyer’s strike on “GetUp!” in 2011 to this day.
      EVERY.SINGLE.TIME

  10. Goldstandard1MEMBER

    So macro business is pro ever-higher property prices? I don’t think so but I do find the commentary confusing as I find Leith and DLS different thinkers and I rate that.

  11. Be thankful the interest rate lever is with the RBA, not the crazy futures markets.

    Lol, I see what you did there.
    No wait, you are serious.

  12. UpperWestsideMEMBER

    How much house funding is still from offshore these days?.
    And if the Fed is tightening what does that do to the Aussie banks wholesale funding margin over BBSW/bonds etc.

    • elasticMEMBER

      I’d be surprised if they need any OS funding given the excess deposits in the system and the TFF which enabled the banks to ditch their OS debt

  13. For those looking at the Aussie economy curling up its toes, yep it probably will happen, but not any time soon. The economy has strong momentum with strength visible all over the place, so its not just going to do a u-turn. Captain Phil is gonna have to push rates higher, maybe not to levels implied by the forwards but high enough to cause some real pain.

    As for the property and stocks crowd, they’re gonna experience a bear market, potentially a big one. Powell and Co can’t prop the market up with inflation like it is – and Mr Lowe, Aussie is not exceptional – and if they try to rescue the market, given how unstable inflation expectations are, they may not get a rebound in assets and activity but in assets and inflation, that won’t go down too well… theyve got to anchor inflation expectations first

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