RBA signals mortgage doom for households

In Tuesday’s media conference following its decision to lift the cash rate by 0.25%, Reserve Bank governor Phil Lowe said it was “not unreasonable” to expect the cash rate to climb to 2.5%:

“How quickly we get there, and if we do get there, will be determined by how events unfold,” [Lowe] added, pointing out that 2.5% is the middle of the bank’s target band for inflation, meaning that when the cash rate gets there it will be zero in inflation-adjusted terms, rather than negative as it is at the moment.

CoreLogic has provided a useful summary of what rate rises mean for the typical Australian mortgage borrower:

Mortgage repayment projections

How much will your mortgage repayments rise?

If mortgage repayments were to rise by 100 basis points, then repayments on the median priced Australian home would surge by $323 a month, and by $357 across the combined capital cities. This would represent a 14% increase in mortgage repayments.

If rates were to rise by 200 basis points, then monthly repayments would surge by $668 a month nationally, and by $738 across the combined capitals, representing a 28% rise in mortgage repayments.

While not illustrated above, average mortgage repayments nationally would surge by $848 a month and by $937 across the combined capitals if rates were to rise by 250 basis points. This would represent a 36% increase in mortgage repayments.

As shown above, the dollar increase in mortgage repayments would be much higher in Sydney, owing to its status as Australia’s most expensive market with the most indebted households.

If Phil Lowe believes Australian households could absorb a 36% increase in mortgage repayments without crashing house prices and plunging the economy into recession, I have a bridge to sell him.

Unconventional Economist

Comments

    • Tassie TomMEMBER

      Very true. Here in Launceston if you halved house prices from today’s lofty heights they’d still be worth more than they should be. But you’d crash the whole economy in the process of doing so.

      • Grand Funk RailroadMEMBER

        I must confess I sometimes wonder if that is someones ‘Plan B’ if they cant get what they want.

        The simple fact of the matter is that almost none of Australia’s locales are economically self sustaining without having government largesse funnelled down them, which it creams off natural resources. A house in almost any of them is ridiculously expensive in comparison with what you would get in many other inflated house price markets elsewhere.

        We are all being held to ransom

      • if you halved house prices … you’d crash the whole economy

        Alarmist nonsense.

        If house prices halved would milk still flow from cows’ udders?
        If house prices halved would eggs still come from chooks’ vents?
        … would rain still fall from the sky into our dams?
        would wheat still grow in the fields?

        Obviously yes.
        The covid event has shown that govt has super-powers to control society.
        Using its covid super-powers govt stopped all office workers from going to the office. Did the economy crash? No.

        Using its covid super-powers govt ordered an experimental gene therapy into the arms of most adults and children. Did the economy crash?

        If house prices halve then govt can once again use its covid-style super powers to keep things going. Farmers can be ordered by the chief medical officer to continue to milk the cows.

        Victorian police can force milk truck drivers to continue to deliver the milk to stores. They can beat any drivers who refuse. New-Australian supermarket workers can be ordered to continue to stock the shelves. A horse can walk over any who stop working.

        Real Estate Agents could be ordered to close, or banned from selling houses at unapproved times or prices. Need I go on?

    • GonzificusMEMBER

      Ridiculous is too slow, we’re going to have to go to ludicrous speed. I don’t know if Australia can take it, we’ve never been that fast before.

  1. pfh007.comMEMBER

    The bottom line is that all those people who spent the last few years demanding that the RBA must reduce interest rates and engage in QE rather than address the fundamental problem of a badly regulated public monetary system built on debt peddled into residential housing have now got exactly what they wanted.

    An economy where household leverage has been absolutely maximised and public debt is now rapidly expanding to provide the stimulus that monetary policy can no longer provide ( house prices falling at 0%)

    The only thing that might save us from inflation is NOT a recession caused by interest rate rises but the recession caused by the inability to maintain the supply of monetary stimulus (further interest rate cuts) that the economy is now so dependent on.

    But what is more likely are prices rising AND a recession.

    And you can forget trying to avoid that with even more public debt as that will rapidly become unsustainable as well despite what Magic Money Tree economics might say.

    The solution to too much debt is less debt not more and the least painful way of doing that is to allow non banks and the public to open zero interest reserve accounts at the RBA.

    MORE DEBT FREE money is just what the doctor ordered.

      • boomengineeringMEMBER

        Well that was my first laugh of the day after yelling at a pair then another ringtail while riding this morn.
        MMT = Magic Money Tree. lol, so true.

      • pfh007.comMEMBER

        GFR,

        Well that is a given so the ALP need to be getting ready for major reform and the first step is to allow non banks and the public to operate zero interest reserve accounts at the RBA.

        That will establish the basis for a debt free core to the public monetary system and zero interest for highly liquid and extremely safe savings.

        That will allow a start on resolving all of the incoherences in having private bank debt and their debt peddling as 95% of the money supply.

        • ErmingtonPlumbingMEMBER

          Id like to see citizens be able to borrow directly of the Govie, at the RBA cash rate or even a guaranteed close to zero percent rate, for owner occupier Home buyers.
          Maybe Cap the amount you could Borrow at this reduced rate to the average house price of the area the purchase would take place in.
          This would be fairer for working class people wanting to buy a home who lack “the bank of mum and dad” backing them up.
          Smash the money for nothing property investors with Sky high rates or those constantly trading into properties worth millions more each move but protecting families with high rates of home ownership should be a primary political imperative.
          The best way to to stop prices from Spiralling upwards is to cut back tax Concessions on residential property investment AND massively expand social housing builds that percentage of the population, that for whatever reason, will never own and shouldn’t have to solely rely on the private rental market for, essential for life, shelter .

          • On the titanic they had roughly 1000 lifeboat seats for 2000 people. This was rationed with a “women and children first” policy. As a result many men missed-out on a seat and drowned.

            A brilliant Labor politician has proposed that the men who missed-out should have impersonated women and thereby would have increased their chance to get a seat.

            Ermo, your credit-rationing proposal puts you in the same class as the brilliant Labor politician. Well done.

            The best way to stop prices from spiraling upwards is to create houses faster than people and turn the shortage of housing into an abundance. Air is abundant. Do you know many people who obsess about the price of air?

          • pfh007.comMEMBER

            Ermo,

            I agree that households should be able to borrow at low cost for the purposes of housing but that is not directly a job for the RBA.

            That is a job for a home housing lending authority. A bit like Fannie Mae in the USA.

            It would supply funds to lending agents who might offer 20 year first mortgages up to say 80% of the value of the property at a low rate.

            The lending authority would either obtain its funds from either selling bonds in the open market or by selling them to the RBA at an agreed fixed “housing policy” rate.

            Arguably it might be best to limit these mortgages to first home buyers as people buying a second home are probably able to look after themselves when it comes to obtaining finance.

            Even better is to do as The Claw implies and limit these “housing policy” cheap loans to FHB buying a newly constructed house or unit.

            When we have a persistent rental vacancy rate of at least 3% and preferably 4% then we will know we are on the way to affordable housing.

    • Well said P00f#7, I don’t know why Glen lowered rates during his term? I recall house proces were falling, and he lowered them twice, it did nothing of course except turn the housing market back into growth

      • pfh007.comMEMBER

        Yes. It is perplexing how resistant people can be to evidence demonstrating that their model is a dud.

        If anyone proposed building a public monetary system around scads of private bank credit sprayed at asset classes like existing housing they would be laughed out of town.

        Instead of fixing the problem they insist on giving the broken model yet another go!

        Just look at the way so many were applauding the RBA trying QE, TFF and ZIRP.

    • BabundaMEMBER

      Spot on. The interminable Dr Ken Henry was on the radio this morning crowing about his intergenerational report from 2002 which predicted the economy would be in shambles in 40 years if we didn’t drastically lift growth via productivity. Not wrong. But what he failed to mention then and now is that the reason productivity is in the gutter is because our financial system directs virtually all investment flows into unproductive assets, mainly real estate. He also failed to make any recommendations that would do something, anything about that. This of course from the same Ken Henry who led NAB through the worst period of bank corruption in Australian history.

      • pfh007.comMEMBER

        Yes – Dr Henry is very good at sounding like he thinks he is the smartest person in the universe but he is hot welded to the failed model of banking regulation that is now causing so much misery.

  2. happy valleyMEMBER

    “If Phil Lowe believes Australian households could absorb a 36% increase in mortgage repayments without crashing house prices and plunging the economy into recession, I have a bridge to sell him.

    Nah – very simple – as cigar chomping Joe Hockey said: tell ’em to get a better job. That will fix it.

  3. The Travelling PhantomMEMBER

    If we have proper retirement funds, superannuation and pension..people won’t be so focused on housing and equity….

    • Absolutely and housing investors all tell me they don’t want to be a burden on society by being on a pension in retirement. No recognition or mention of the $40-$80K per annum in taxes they’re skipping out on over decades to get there. It’s cheaper for us to pay them the pension. It might help if we weren’t capped at $27.5K pa in super contributions too.

      • We all know that an old person who signed a few documents a few decades ago and now receives $800 per week called rent direct from a struggling young family is far less of a burden on society than an old person who neglected to sign such documents and now receives $350 per week called pension.

        $800 of burden-free gluttony vs $350 of burden frugality.

        As soon as you stop physically contributing you become a physical burden. Some will be a net life burden, others a net life contribution.

  4. WhatcouldgowrongMEMBER

    The whole economy is one big margin loan, except unlike the stock market, the price of houses always goes up or so I’m told. Big leverage means big swings. It’s going to be an interesting ride, though I expect that since the game is rigged it’ll be fine for all the right people.

  5. “If Phil Lowe believes Australian households could absorb a 36% increase in mortgage repayments without crashing house prices and plunging the economy into recession, I have a bridge to sell him”

    …. a heavily discounted bridge it must be said …savvy sellers gotta meet the market

  6. JoeJackMEMBER

    “If Phil Lowe believes Australian households could absorb a 36% increase in mortgage repayments without crashing house prices and plunging the economy into recession, I have a bridge to sell him”

    I would prefer to have a nice tree to hang him from.

    • Can’t believe more isn’t being made of his no interest rate rises before 2024 call just months ago and now the rise. This is Teflon Phil.

      • That’s right. It was completely irresponsible and incredibly arrogant to claim such a thing in the first place. How many gullible borrowers actually believed him and jumped in thinking they’d have a few years to knock a bit off the loan?

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