Markets ready crippling mortgage jumps, house price falls

The latest Australian interest rate forecast from the futures market predicts the Reserve Bank of Australia (RBA) will hike the cash rate from its current record low level of 0.10% to 2.5% by year’s end and to around 3.4% by September 2023:

Australian interest rate projection

Futures markets are tipping nine interest rate hikes in just seven months.

If the market’s prediction comes to fruition, then Australians would experience the equivalent of around nine 0.25% interest rate hikes in only seven months, with more to come in 2023.

Assuming these forecast increases in the RBA cash rate were passed on in full to Australian mortgage holders, then by the end of 2022, average Australian mortgage repayments would soar by around one-third above current levels.

This would add around $850 to average monthly mortgage repayments on the median priced Australian home and nearly $1,300 a month in Sydney:

Australian median monthly mortgage repayments

Median monthly mortgage repayments would rise by one-third by end-2022.

Australia’s Debt Servicing Ratio (DSR) – defined as the percentage of household disposable income going towards principal and interest debt repayments – would also surpass its Global Financial Crisis peak and hit a record high by year’s end:

Australia's debt service ratio

Australia’s debt service ratio would also rise to a record high by end-2022.

Obviously, we consider the market’s interest rate forecasts to be delusional, given rate rises of this speed and magnitude would very likely crash house prices and throw the Australian economy into an unnecessary and unwanted recession.

Just be glad the interest rate lever rests with the RBA, not the futures markets, given the RBA is likely to take a more measured and responsible approach toward interest rates.

Unconventional Economist

Comments

  1. DingwallMEMBER

    “……..throw the Australian economy into an unnecessary and unwanted recession.”
    Necessary and warranted in my view. The stinking edifice built on real estate needs a massive reset and we need start to produce/manufacture/innovate goods and services that actually make the country and the world a better place.
    Everybody cheers like mad when we build more feature walls, airbnb’s and auction hammers and prices go stupid… but a couple of steps back towards reality is greeted with wails of disbelief and angst.
    Let it burn … and burn hot.

  2. Just be glad the interest rate lever rests with the RBA
    Why? Many of us don’t give a fcuk. In fact, the savers may hope for the first hike in a decade.
    “Don’t hike now!”

    • Yes indeed we do, savers and those who saved forever and need the income to live. As well the pension funds need decent interest rates to survive otherwise we are ripe for Klaus Schwab and his Global Leaders, Clair ODare, Scomo, Dan Andrews, Trudeau, Arden. where they crash everything, default debt and take everything, and they say we own nothing. Etc they say we will be happy. Putin told Davos and Schwab the Great reset is done, broken won’t happen, they will not have one ruling over all the planet of hackable human animals and end of free will according to Yuval Noah Hararai.

  3. The movements of interest rates and the changes of the prices of recently sold houses are absolutely fascinating.

    Also of interest is the physical realm. Do all Australians have enough to eat, adequate clothes, medicine and shelter, etc.

    It is interesting to note that if there are 7 houses for every 10 families, then 3 families must must-out. Without building an extra 3 houses or removing 3 families, there is no way that a change to interest rates and houses prices can alter this reality (of missing-out).

    In fact it could be argued that houses prices must somehow reflect the reality of physical availability of houses. Shocking though it may be to an economist with an Excel spreadsheet.

    Commonsense might indicate that if there were say 12 houses available for every 10 families then one might expect prices and rents to be quite low. Conversely if there are 7 houses for every 10 families then one might expect prices and rents to be somewhat higher.

    If Australia has sufficient land for every family to get a small parcel, and we have building materials and can build a house with a few men in a few months, then why not create the housing this way without finance being involved?

    eg. Each man* would be expected to spend several months creating building materials and/or building houses. Once he has done his share of this, he would be given his share of land with a house on it. There would be no need for finance, money or interest rates. What each man gives is balanced by what each man takes.

    * Of course the term man includes male and female and trans, etc. Gender does not affect the main concept here.

  4. kiwikarynMEMBER

    The RBA’s remit is inflation not maintaining house prices. Politically the soaring cost of living affects 100% of voters, whereas mortgage interest rates only affects 35% of voters. Guess who wins?

    • GarethMEMBER

      Not that simple – a crashing housing market destroys part of the $10T in housing asset values on which Australia’s entire wealth construct is built. Only 2.5T of that has debt, they are 1st to get cleaned up. If however you have a paid off home worth $1.5m and the value collapses to $750k – your entire outlook on discretionary spend changes.

      Good night economy.

  5. I keep hearing about these huge amounts of money that are “owed” by Australia. eg $1 trillion AUD.

    Who is the money owed to?
    Why don’t we just print the money and pay it all back tomorrow?

    Along the same lines there seems to be a general terror that higher interest rates will hurt everyone. But every dollar extra paid in interest is also a dollar extra in interest collected. Do these net out? Who will be getting all the extra money? Am I allowed to ask?