Markets forecast interest rate tsunami, house price crash

The futures market has truly lost its marbles, ratchetting up its Australian interest expectations even higher.

As shown below, the RBA cash rate is now forecast by the market to hit 2.75% by the end of this year and around 3.7% by September 2023:

Market interest rate expectations

Market interest rate expectations soar.

The next table shows what the market’s forecasts would mean for Australians purchasing the median priced home with a 20% deposit and using a principle & interest mortgage. The table compares repayments at the beginning of April at prevailing average mortgage rates (i.e. before the RBA hiked by 25 basis points and the cash rate was 0.10%) with repayments at December 2022 (plus 2.65%) and August 2023 (plus 3.6%) under the market’s interest rate projections.

Projected Australian mortgage repayments

Could you tolerate a 50% increase in mortgage repayments?

Under the market’s interest rate expectations, mortgage repayments on the median priced Australian home would soar by $957 (36%) by the end of 2022 and by $1,332 (50%) by August 2023.

Repayments would obviously be higher across the combined capital cities, and much higher across Sydney – Australia’s most expensive city.

The next chart shows that Australia’s Debt Servicing Ratio, which measures the proportion of household disposable income chewed up by principal and interest debt repayments, would soar 2% above its 2008 Global Financial Crisis peak by September 2023 under the market’s forecast:

Australia's debt servicing ratio

Aussie debt repayments would soar to record highs.

Our view remains unchanged. We consider the market’s interest rate forecasts to be delusional given rate rises of this magnitude would very likely send many households broke, would crash house prices and consumer spending, and would plunge the Australian economy into an unnecessary recession.

In fact, the only market participant with a sensible view on interest rates is the CBA, which is tipping a peak in the cash rate of 1.25%. Anything higher than that would be economic suicide.

A video version of this post is presented below.

Unconventional Economist
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Comments

  1. GarethMEMBER

    3.5-6% IR for punters based on a spread of forecasts. Is only fans the new household hustle for mum and the 19yr old daughter?

    Dad will be in the office stabbing his colleagues in the back for a pay rise. Much brown nosing coming mgts way.

  2. Consider, too, another significant impact: as property speculators expect less capital gains, they will leave the market…that’s a lot of churn to lose for an economy dependent on such churn to both fuel normal life, but also keep financial bubbles afloat

  3. The Travelling PhantomMEMBER

    Nothing will happen…look at NZ they’re ahead of us in the rates increasing and all what happened is 4% drop in house prices…

      • Absolute BeachMEMBER

        Rofl. Like man with donkey who saves much money by halving food each day. Donkey still work. But then donkey die. No more donkey rides.

    • Goldstandard1MEMBER

      LOL. There is no avoiding this market break. It’s not property, it’s financial markets breaking. You need to accept now and i’m not saying they won’t throw the kitchen sink at it. They will. But that’s it now.

  4. What’s the alternative? High inflation and wage growth? Well we know at least one of those things won’t happen. If we keep going down this current road we end up with Feudalism. Hopefully I’ll be dead before I have to petition a lord for a fief.

    • Mega65MEMBER

      The alternative is reform, but that stopped being talked about in 2010. So being that we want to keep the current system as is, yes, feudalism is the alternative. Otherwise a complete loss of all government services, mass poverty and starvation.

  5. I thought we had $250B cash lying around & CBA et al stress tested borrowers at higher interest rates? So why does CBA say 3% will kill everything ?

    • dennisMEMBER

      I think stress testing at higher rates is a newish thing, still plenty of people who borrowed before that. And even if they have, it’s still money that won’t be moving through the economy, so business will feel it and that will make its way around!?

    • elasticMEMBER

      So who ended up with all those billions? Not the Aussie battler on a 400 sqm block on the outer fringe
      Gerry Harvey pocketed a chunk of it though

    • The bank stress tests your ability to pay them, at the end of that test point is where you spend nothing on discretionary items….. you can kill a big chunk of economic activity without initially killing a bank balance sheet….. once that fall in activity translates to jobs and wages then you have an issue.

      It’s one thing to normalise rates, it’s another to push them well into contraction territory…. Why people can’t get their head beyond that binary is beyond me…..

    • Goldstandard1MEMBER

      And that means that something breaks, which trust me, is much worse than increasing interest rates and letting plebs and middle class plebs go bankrupt. Choose your poison but thes is the end of status quo.

        • Goldstandard1MEMBER

          Genuinely not sure yet. I know it means not relying on gov to save everything like in the past. Global issues are too powerful now. Position yourself appropriately.

  6. ” Australian economy into an unnecessary recession”.. no I’m sorry, I feel this is quite necessary.
    Who builds an economy on real estate overleveraging? What do you have to smoke to think that the market will correct itself first to ensure the participants DONT go broke?

    • elasticMEMBER

      The economy needs to deleverage and that won’t happen while punters are encouraged to overextnd themselves through ultra low rates. Higher rates and QE may get the job done

  7. This multi-decade hyper bubble is now nearing its end. It is absolutely undeniable.

    It will pan out over the next 3-5 years.

    A misinformation and fear driven kerosene balloon that will scorch everything as it goes pop.

  8. Jumping jack flash

    “rate rises of this magnitude would very likely send many households broke, would crash house prices and consumer spending, and would plunge the Australian economy into an unnecessary recession.”

    Indeed. I don’t know if anyone has actually realised just how much debt spending contributes to the demand and jobs and wages and debt growth that we have all enjoyed over the past couple of decades. I don’t think there was much else other than debt spending to be honest.

  9. I agree
    Imho the only reason they are raising rates now so as not to break the AUD , raise rates, burn “the economy” i.e housing , or dont raise rates and import all kinds of inflation.

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