Australia confronts fixed rate mortgage tsunami

RateCity’s Sally Tindall warns that millions of Aussies that locked in ultra low fixed mortgage rates during the pandemic face a massive rise in mortgage repayments when their loan terms expire:

“Borrowers’ fixed rate immunity will only last for so long. When the merry-go-round stops, it’s going to be a shock for many because their new rate will be significantly higher,” [Tindall] said…

The analysis, which covered the big four banks’ half-year results and APRA loan book data, shows about 38 per cent of home loans are currently fixed, in dollar terms, with the peak of people coming off their fixed rates around mid-to-late 2023.

Westpac has the highest proportion of fixed mortgages as 40 per cent, followed by CBA’s 38 per cent, NAB’ 37.4 per cent and ANZ’s 35 per cent.

On a 500,000 principle and interest loan fixed in July 2021 for two years at a rate of 1.94 per cent, the current payment is $2105 per month.

When the fixed rate ends in July 2023, the average revert rate is likely to be about 5.68 per cent, if forecasts for the cash rate are realised, sending monthly repayments to $3042 – an increase of $937 per month.

Tindall’s analysis is conservative based on current interest rate forecasts.

The futures market is tipping that Australia’s official cash rate (OCR) will be at 4.3% by the time that most fixed rate mortgages expire in late 2023:

Australian interest rate forecasts

Market interest rate forecasts are scary.

If this forecast comes to fruition, it would drive the average discount variable mortgage rate to around 7.7%, assuming increases in the OCR are passed onto mortgage holders:

Australian mortgage rates

Australia’s discount variable mortgage would more than double.

In turn, borrowers that secured ultra-low fixed rate mortgages at below 2.5% would face a tripling in mortgage rates when it comes time to refinance. It would be a bitter pill to swallow, even for those that have built up substantial financial buffers.

Hopefully the market is dead wrong and the RBA stops hiking long before mortgage rates hit 6% or 7%. Otherwise Australia’s housing market will face its biggest price crash in more than 100 years.

Unconventional Economist
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Comments

  1. The RBA are probably praying that they can start cutting rates in 2023 once the economy shudders to a halt. If inflation gets entrenched for a sustained period there’s going to be trouble

  2. Philip Lowe needs to resign, the impact of his weasel words on rates cannot be waived so easily as he thinks. He needs to own it along with the pain he has inflicted on the highly leveraged, especially first home buyers. Bring on the RBA independent review with haste!

    • The Travelling PhantomMEMBER

      Unless it’s revealed the Scomo government pushed him to do so, not to mention all the schemes joshy and Sukker did that lead to collapse of all those construction companies

    • @ alex, So RBA are the only ones responsible for people being highly leveraged?
      Australian property is a bubble that needs to burst at some point. Now it looks like happening everyone is squealing like little bit#hes…

      • You are likely better informed than those b^tches, not everyone buys a house to become property specufestor, many people buy them to you know, simply live in and don’t spend hours each day reading economics blogs.

        • So you agree mate.
          Interest rates go UP and DOWN…
          So when you sign the dotted line you accept this and shouldn’t cry like a bit#h if they don’t go their way.
          Sweet buddy. 😋

  3. 2023HomelessMEMBER

    So we are now 2 weeks away from 1.35% OCR. PvO and CBA were calling this peak rates and the point of a property crash. Seems likely the OCR will keep streaking ahead, property will fall and the market predictions for the cash rate have been more accurate to date. So maybe a 4% OCR isn’t as unlikely as thought?

    On the ‘imported inflation’ argument. I don’t buy it. It’s an energy price and supply driven event. Other than oil, we don’t import energy. And our domestic policy is our own driver. On supply chains, the move to cheap international imports drove down rates over 20years, so a reversal is driven by domestic decisions on manufacturing. And last, I expect wages to take off now. They have been suppressed in part by state and federal gov bargaining policies which set a bench mark for broader private sector wages. The states and federal wages dam has burst, and I see this is the start of a wage increase and more entrenched inflation.

    So expect rates to keep rising, closer to the market prediction. But also expect a global recession reset before it gets too far away.

      • 2023HomelessMEMBER

        Fed will break something. This ‘event’ will be given a name relating to what the fed breaks. Demand will be crushed. The illusion of stagflation being entrenched will disappear. Deflation will commence again as supply chains open up and wage increases die due to unemployment rising. Commodities break etc etc.

        The real question is, what will the Fed break? And therefore what will we therefore be calling this recession forever on….

        • boomengineeringMEMBER

          ..WHAT WAS CLAIMED
          In 2008, oil prices were 50 per cent higher than in 2022 but petrol was almost half the price.

          OUR VERDICT
          False. Statistics show crude oil prices in 2008 were not 50 per cent higher than this year, nor was petrol half the price.

          A Facebook meme claims that in 2008 oil prices were 50 per cent higher than in 2022 but petrol was almost half as much at the pump.

          The meme, which has been widely shared in Australia and Canada (here, here, here and here), says in 2008 oil was $147 a barrel. This is false.

          World Bank data shows crude oil prices ($US per barrel) jumped around in 2008 but only peaked at $132.83 in July. They started at $90.69 in January before dipping to $41.34 in December.

          The price per barrel in 2022 started out at $69.96 in early January before rising steadily to a peak of $123.5 on March 8. At the of writing it was 109.5.

          The meme also claims that in 2008 petrol cost $1 per litre and in 2022 petrol costs $1.83 per litre.

          This Australian Institute of Petroleum chart shows the Australian national average for unleaded petrol (including GST) in 2008 was $1.36 per litre and for this year – January 1 to March 18 – the chart showed petrol costing $166.3 to $188.6 per litre.

          According to Statistics Canada, in January 2008 unleaded petrol (in Canadian dollars) varied from $100.3 in Alberta to $115.3 in Quebec. Petrol prices for that year peaked in July ($130.3 in Edmonton, Alberta to $156.5 in Victoria, British Columbia) before plummeting in December ($69.5 in Ottawa-Gatineau, Ontario to $99 in Yellowknife, Northwest Territories).

          For 2022 in Canada, only regional petrol prices were recorded for January and February which showed prices ranged from $133.7 to $177.1. No March figures were available at the time of writing.

          Nicolas de Roos, a professor specialising in retail petrol markets at the School of Economics, University of Sydney, said comparing oil prices in 2008 to 2022 is akin to comparing apples to oranges, as 2008 was an anomaly, recording highly fluctuating prices.

          “2008 was a crazy year, with wild swings in oil prices,” he told AAP FactCheck by email.

          He noted that in 2008 Australian oil prices rose rapidly before taking a battering in the latter quarter when the Global Financial Crisis – the deepest recession in the world economy since World War II – hit. Between July 2002 and July 2008, a clear upward trend in prices was evident, while prices fell sharply in the second half of 2008.

          Prof de Roos explained petrol pump costs in Australia aren’t determined exclusively by oil prices but by Terminal Gates Prices (TGP), which are wholesale prices available to petrol retailers.

          TPGs take into account shifts not only in oil prices but also in exchange rates and taxes.

          “Oil prices are denominated in US dollars so you need to account for the AUD-USD exchange rate to understand pricing in Australia, and TGPs do this work for you,” he said.

          The current TGP sits at around $1.98 a litre, but could hit $2.50 later this year if the war in Ukraine continues and drives up global oil prices, predicts Craig James, chief economist with CommsSec.

          In 2008, the TGP peaked above $1.60 per litre in July and plummeted to $1.00 in December, and retail prices went from $1.70 a litre (June/July) to $1.00 (December), Prof de Roos said.

          “Because of wild fluctuations, there was a time in 2008 when exchange rate-adjusted oil prices were high, and a time when retail petrol prices were low, but they were not at the same time of the year.”

          The fluctuations are backed up by the Australian Competition & Consumer Commission (ACCC) report, Monitoring of the Australian petroleum industry 2009 – Summary. The report on prices, costs and profits of unleaded petrol in Australia states: “After reaching a peak above 160 cents per litre in July 2008, retail prices fell rapidly between October and December 2008 with the onset of the global financial crisis.”

          Similarly, an ABC News article quoting the ACCC, described petrol prices during 2008-09 financial year as “the most volatile on record”.

          The meme also states “the war in Ukraine is not the reason” for the changing prices.

          In response, Prof de Roos said oil prices were already unusually high before the conflict but they have risen further since Russia launched a full-scale military invasion on Ukraine on February 24.

          “It’s hard to say what the price of petrol would have been without the conflict, but I’d be surprised if it would’ve been much below $2.00 a litre,” he said.

          Before the Ukraine invasion, the COVID-19 pandemic had already caused petrol prices to rise, noted associate professor David Byrne from Melbourne University’s Faculty of Business and Economics in an April 2020 analysis.

          The ACCC’s latest petrol monitoring report states petrol prices in Australia’s five largest cities hit an eight-year peak in February, triggered by the conflict in Ukraine, the OPEC cartel’s refusal to boost crude oil production and recovering oil demand as countries relaxed COVID restrictions.

          The report reveals daily average retail petrol prices in Sydney, Melbourne, Brisbane, Adelaide and Perth crept to 182.4 cents per litre in February – the highest level since 2014. Prices have risen further in the first two weeks of March.

          “The world was already experiencing high crude oil prices late last year due to the continuing actions of the OPEC and Russia cartel, and the enduring Northern Hemisphere energy crisis. The shocking events in Ukraine have forced crude oil prices even higher, as Russia is a major supplier of oil,” former ACCC chair Rod Sims said in a media release.

          “Crude oil prices have been climbing sharply since late-2020 and prices at the bowser here have followed.”
          .
          WHAT ABOUT BUYING POWER THEN AND NOW.

          • chuckmuscleMEMBER

            fact checkers are complete morons.

            “The meme, which has been widely shared in Australia and Canada (here, here, here and here), says in 2008 oil was $147 a barrel. This is false.
            World Bank data shows crude oil prices ($US per barrel) jumped around in 2008 but only peaked at $132.83 in July. They started at $90.69 in January before dipping to $41.34 in December.”

            4 seconds on bloomie and one can see that in fact wti oil did peak at $147.27 on 11-July 2008

          • @chuck, haha looks like they’ve gone and got the end of month price instead of the intra-month peak OMG

    • While we are a net energy exporter, that has not stopped energy costs jumping locally, esp on the east coast. Policy failure and greed has created a case where we will have outcomes similar to energy importers. So really a “perfect” storm.

      • Exactly. Although technically we export gas, it’s all owned by foreigners, they pay no tax or royalties on it, employ very few workers (mostly foreigners) and we don’t reserve any of it, so we are fully hit with the world gas price. We are a hollowed out energy price taking joke.

      • Why wouldnt energy go up? As a country we want the benefits of global trade and export, but as consumers we dont want to pay a global price. Seems odd logic.
        We produce legs of lamb here also. If our currency falls 50%, and it becomes 50% cheaper for international buyers to buy that leg of lamb, why wouldnt you export for a higher price than sell local for less?
        Just because we produce it here in Australia, dose not mean we are immune to international pricing on that product

        • drsmithyMEMBER

          Just because we produce it here in Australia, dose not mean we are immune to international pricing on that product

          The key point is that this is a policy choice. We can choose to prioritise Australians, or not.

  4. pfh007.comMEMBER

    Don’t blame the RBA.

    They were told they were lunatics for not driving “bait rates” down even faster just a few years ago by all the mainstream monetary policy maniacs.

    It was crazy advice and was noted at the time by many.

    Hopefully inflation subsides (more likely they will just tweak the calculation to make it vanish) and the RBA will have some room to move.

    May depend on how quickly the ALP can flood labour markets with cheap vulnerable imported labour.

  5. At least Australia will beat New Zealand again with the magnitude of any housing bust given the forecast OCR path, if one is to believe any forecasts/ figures that are trotted out daily.

  6. Those who bought before 2019 will find themselves back in the same financial situation as in 2019, or even a bit better, with the same interest rate but meanwhile 8% of their loan either offset or paid off. The tsunami will only hit those who bought during the pandemic, as well as those who were in trouble before but were kept afloat by the pandemic.

    • What appears to be breaking is the credit creation process itself. Prices are 300-400% higher than value, when the credit bubble dies all other bubbles die. The creation of money out of thin air for the benefit of elites is not a sustainable business model. Not Russia going for a commodity backed currency.

  7. Inner Sydney…….If inflation persists ( and Mr Putin says yes ) then the fact that houses are now a financial asset and not an income investment will make things very different than the 70’s. People will no longer be able to ignore real losses and wait while nominal price looks O.K. because they have been financed differently Prices may drop quicker than in the past as even so-called cash buyers have been increasingly getting their cash from hard money lenders on the quiet and will need to liquidate. It is not as though renters can afford any increases.

    https://twitter.com/IndusTrainCons/status/1538023540385280000

    • Interesting comment/observation about housing being financial investment rather than income producing investment. I hadn’t made the connection that as the forces of continuous debt creation and expansion falter this may open a vacuum under housing prices.

  8. MathiasMEMBER

    Look at how far Aussie Interest Rates have yet to rise…
    https://gyazo.com/938c0fa71bead8f523d36ef6036735b1

    With a carry trade on the dollar that severe, Im just amazed the AUDUSD has been so stable and isnt falling like a rock.

    Yeah… Raise Rates -or- Take a Currency hit. Well, its one or the other. Decisions Decisions Australia.

    Property owners will probably just hold on and ‘ wait it out ‘. They’ll get so burned. Its going to be so hilarious.

    Cha Cha Cha Chaaaaa Cha Oiy … Cha Cha Cha Chaaaaa Cha Oiy .

    Thats what people get for being so greedy.

    The young can always get a job. The old will probably never recover. Its hard to have sympathy when they never had sympathy for you.

    • Uncle WattleberryMEMBER

      Oh, I don’t know about this mate. I think your parents were just trying to put a roof over your young head. If they get burned, you might have the hilarity of them or your in-laws living in your house.

      • > you might have the hilarity of them or your in-laws living in your house.

        My father wasnt a Boomer. He was part of what was known as the ‘Golden Age’. I think I was very privileged to have a father and even more privileged to have one who had so much experience for life as what he did. A guy who grew up in times when horses where the modern form of transport, Brisbane was nothing but a dirt track and marrying your wife meant showing up in a Black Chev to ask her hand in marriage as she said, ” awwwright “. Jobs that lasted 30 years. Marriages that lasted 50+ years and familys that actually stayed solid. That kind of thing just doesnt happen in Australia today. He was a good guy when he was alive.

        I’ve spent considerable time looking after certain Elderly. Im the guy who ends up at the Funeral, having to organise that Funeral, having to stay strong while the entire rooms falls apart ( woman dont handle this stuff very well ). Im the guy who’s driven people to hospital while there health has collapsed which gave them an extra 10 years of extended life they never otherwise would ever have had.

        I grew up with guns. Staring down the barrel of a rifle as I crouched beside Dad, at 5am in the morning on a cold barrel, as he taught me how best to be downwind so they dont pickup your scent. My favourite dog, riddled with athritis and crouched in a corner, Dad handing me a rifle while glancing at me to say, ” He’s in a lot of pain. Its your dog. Its your choice. “. Learning the value of putting a rifle to something I cared for and loved, as its little eyes looked back up at me and I pulled a trigger so it would not have to feel pain anymore ( I’ve never touched a gun since ).

        I have spent days in cemetaries, reminded of death, cutting away weeds and sweeping the dirt off a stone slab for good Aussies who where once alive that nobody is ever likely to remember again.

        Im also the product of a prestiguous Right Wing Elite School of Brothers who understands the notion of Honor and Decency… a reasonably prestiguous University and also someone who’s been entrusted in my young days by segments of the Australian Government in roles of reasonable importance. By the age of 13, two of my school mates had suicided due to all the bullying and expected pressure that comes with being in such a prestigious school.

        I’ve had to clean up the mess after my best Aussie mates suicide on multiple occasions. I’ve had to clean out rooms and pack his stuff into boxes while people walk through and say, ” Yeah, he was an idiot in life and an idiot in death “. I mean, this guy was in the Army. He went to places most people couldnt even imagine and he saved people. The day he died, not one Australian I saw ( not even his own family ) bothered to show that guy any respect. I was pretty much the only guy at his funeral.

        So if I want to spend the rest of my days surrounded by forest, nursing a birds wing to health so it gets to fly again then that is going to be my prerogative… because ‘Life is about Living’.

        My problem is Im surrounded by cowards and idiots. There are some good Aussies out there. Some really great Aussies, in fact… but all the great things about Australia are all starting to die over the years. These days, we just have mindless sheep, without integrity and not a single brain cell in there head.

        Australias Right Wing Morons who want us all to Rent our Lives away, who talk about ‘Lazyness, Work and House Prices’ and ‘Manliness and Cowardice’, wouldnt know what that means if it bit them on the a$$.

        Being a Man ( opposite of a coward ), means following the path you believe to be right even though every single person thinks your a nut job, a clown or isnt riding in the same train as everyone else. To be abused by Baby Boomers and House owners for 20 years, called lazy, shunned from opportunities because you werent a Boomer, to watch Governments hand out huge wads of cash for Boomers because they happen to be rich while your best mates are barely struggling to survive.

        The Right are basically an excuse for Corruption which in my eyes, makes them no better then a Drug Dealer. Your damn right I wont be part of this. If I have to live out bush till Im 90, then thats exactly what Im going to be doing. I can not and will not in good conscience be part of this. Its this stuff which killed 14 people I know and I will not support the very system thats responsible for murdering some of the most wonderful Aussies I have ever known. Its the right thing to do.

        I will not give my energy to a system that I feel is already broken.

      • I love Australia and I love my country. I just hate what its become.

        Australias Right are wrong… about everything. Your no better then murderers in my book.

        Im the least cowardice person you’ll know. If you want to see a coward, try looking in the mirror for a change.

  9. Mike Herman TroutMEMBER

    I’ve been wondering about the low stock issue that was part of the property boom through last year. Is it possible that many people purchased property without having sold the previous one, and if so, how many are currently holding multiple properties right now?

    • Hill Billy 55MEMBER

      Quite a few. Its funny that the number of sales of property in Queensland even now almost matches the sales in New South Wales and Victoria. Excluding auctions, there are actually more private treaty sales in Queensland than either of the southern states.

    • Who owns all the Air b&bs? Once the covid savings run out and holidays demand plunges in a recession, holding onto a holiday home with significant interest repayments is going to be a poor proposition.

  10. Finance MessiahMEMBER

    Is Phillip Lowe drunk or asleep at the wheel? It’s hard to tell, given how the RBA is acting. Yes, we all knew that interest rate rises were inevitable, and many reasonable people accept they were coming. They will have to undo these cuts quite quickly come 2023 (maybe sooner) when the damage being done to markets and global economies starts to be felt. Faced with $12 lettuce and spiralling fuel costs, of course we are going to see inflation drop when the RBA starts crippling people who have no money to feed themselves, let alone buy a new TV. If interest rates got to 5%, you would probably see widespread defaults. The RBA is increasing the cash rate, so they have something to do when they have to pull the lever again.

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