Crazed markets collude to topple Australia’s housing market

Just when you thought Australia’s futures market couldn’t get more crazy on interest rates, they have lifted the bar again.

According to their latest implied yield curve, Australia’s official cash rate (OCR) will rise to around 3.6% by December and to 4.2% by May next year:

Implied interest rates

3.3% of rate hikes in 11 months. Good luck with that!

Here’s how the market’s predicted OCR looks on an historical basis. Yes, you are looking at the steepest rise in Australia’s history:

Forecast interest rates

Back to 2012 with a bullet!

And here’s what it would mean for mortgage rates, assuming any increases in the OCR are passed onto mortgage holders:

Forecast mortgage rates

Highest mortgage rate since 2008. Good luck with that!

In its latest Financial Stability Review, the Reserve Bank of Australia (RBA) estimated “that a 200-basis-point increase in interest rates from current levels would lower real housing prices by around 15 per cent over a two-year period”.

Thus, the futures market’s bullish 4.2% OCR would literally ‘crash’ the housing market, with real housing prices falling by more than 30% in real terms and by more than 35% in nominal terms, under the RBA’s modelling.

Anybody that believes these forecasts is truly delusional. If they came to fruition, Australia would experience its biggest house price crash in 100 years and the economy would be thrown into a depression.

The market has truly lost its marbles on interest rates.

Unconventional Economist
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Comments

  1. What is interesting is that I’m sure there are many times in history when the boffins have said “this can’t happen” and yet it did.

    Truly bizarre that house prices up 20%-25% up in a year in what should have been at a minimum a price growth limiting pandemic wasn’t really questioned too much, but now we wail like a banshee over even a potential correction that has yet to play out. Surely this asymmetry is the fundamental problem.

    • ErmingtonPlumbingMEMBER

      I don’t give a fk about how much my house price goes up or down due to the fact I’m planning on being here for another 20 years (at least!)
      But I’m gunna have the sh!ts if my mortgage doubles.
      I’ll be demanding for the banks be nationalised as well as The Gas Cartel!
      But Chris Hedges reckons nothing will change until the ruling classes safety is threatened by an enraged population
      I think He is probably right,…18 mths away?
      https://youtu.be/_uViJYniVMw

      • UpperWestside

        Doubles from what? the lowest mortgage rates in history?
        Interest on owner occupied should be in the 5.5%-6.5% range that would be a normal world
        Given the big moves over the last 3 years it will over and under correct, but through the cycle 5.5%-6.5% average is not unreasonable
        Blame the regulators, I have been arguing for macro pru controls since before the GFC. Their failure is going to hurt a lot of younger people who borrowed more than the traditional 3.5x LTGI ratio. But if they survive this mess inflation will eventually even up the score with the old folks same as it did in the 70’s/80’s

        • ErmingtonPlumbingMEMBER

          “Interest on owner occupied should be in the 5.5%-6.5% range that would be a normal world“

          Pfft! at your “normal world”
          Owner occupier mortgages shouldn’t be over 1% in my view.
          Why the fk should a grubby financial services sector get anything at all from citizens trying to pay for a family home.
          Australians certainly shouldn’t be paying any more than the the RBA cash rate,…the rest is just legalised theft.
          Filthy usury.
          If put to the Australian people to decide the vast majority would agree.
          Probably agree with marching all those bankers straight up to the gallows.

          • UpperWestside

            I wrote and deleted multiple reply’s to this.
            All I can say is I am truly sorry if you are hurting over rates.
            On the flip side my 86 yr old mother in law will be pleased to get some actual interest on the last dregs of her savings

          • reusachtigeMEMBER

            You sound like entitled land owning gentry plumber business boy! You should have voted for our great Liberal Nationalist Party!! Or maybe even 3% Clive.

          • Jumping jack flash

            Im with you ermo.

            They spent multiple decades embracing globalisation and systematically tearing down productive capacity and replaced it with nice, clean, carbon-neutral debt.

            Now that the debt is imploding, they should at the very least attempt to bring back some productive capacity to provide a kind of solid base underneath the debt foam before they pull it.

            Its just debt, all the way down. We’ll be falling for a long time before we hit the bottom. Just look at Japan, and we are far worse positioned than they were

          • drsmithyMEMBER

            On the flip side my 86 yr old mother in law will be pleased to get some actual interest on the last dregs of her savings

            I guess the obvious counterpoint is: why should anyone be paid just for having money ?

          • Jumping jack flash

            “I guess the obvious counterpoint is: why should anyone be paid just for having money ?”

            Technically the bank pays them a bit of interest so they can lend out their money at a comparatively higher rate. This of course depends on demand for debt which is going to tank for decades depending on how this all plays out.

            Personally im not looking for another mortgage for another 30 years, and by that time i wont need one anyway. The banks will be quite happy to survive off the hundreds of billions of interest dollars payable on their existing trillions of debt dollars for quite some time. They dont really need savers now.

            If savings rates go up by a lot I’ll be surprised.

          • I guess the obvious counterpoint is: why should anyone be paid just for having money ?

            Because you permit inflation.

            1) One of the features of money is a store of value, if you intentionally erode this store of value, there needs to be compensation… money is a trust based system after all

            2) As a reward for the risk. Granny by herself may not have enough to lend out…. but enough grannies at the bingo hall put together may… this is combined in the bank vault.

            Once the bank collects them all together, they then loan it out and get a reward, namely by the interest received.

            Granny receives (or should) a share of the interest.

          • Pfft! at your “normal world”
            Owner occupier mortgages shouldn’t be over 1% in my view.

            As long as annual house increase in values can never exceed 1%, then we can start to work with that.

            But if the cost of capital for a house is capped at 1%, and the underlying asset itself has uncapped returns, you’re setting yourself up for more failure.

            Interest rates are the cost of capital…. the price mechanism.,,,,

            A price is a signal to where we allocate resources. We have a track record, particularly through the 20th century, of what happens when the price bears no relation to reality.

            It always starts with sponge headed sentiment like your own … “it’s all about the compassion”… compassion is easy when some one else has to pay… it’s why women do it all the time….

            It always end with the worst type of suffering.

            Why the fk should a grubby financial services sector get anything at all from citizens trying to pay for a family home.

            A loan has a risk element, and an commercial activity element, both of which need to be compensated.

            How do you think a bundle of someone elses money should be acquired, walk into a “costless vault”, take what you want and leave an IOU?

            Australians certainly shouldn’t be paying any more than the the RBA cash rate,…the rest is just legalised theft.
            Filthy usury.

            Getting a loan is for increased consumption.

            i.e. buy a house now by way of a loan, or save up until you can pay for a house in full…. i.e. the loan brings that consumption forward. Now, if you have a repayment schedule….

            that involves forecasting unknown events in the future. one of those unknown events can be the inability to pay… so there is a risk…. so there is a risk premium, and that manifests itself by way of interest rates.

            Some people need to be employed to prescribe loans, to monitor loans, to have infrastructure to facilitate all of this. This is commercial activity, and it needs to be paid for.

            If put to the Australian people to decide the vast majority would agree.

            Educate them on what I said, and less would. Entitled people will always agree to free stuff…. except nothing is free.

            Probably agree with marching all those bankers straight up to the gallows.

            What about Plumbers? Why should you get paid more than the minimum wage… plus a tiny stipend which is the depreciation rate on the cost of your tools? Or are you as grubby as the usurers you described above?

          • pfh007.comMEMBER

            drsmithy,

            “..I guess the obvious counterpoint is: why should anyone be paid just for having money ?..”

            Correct they shouldn’t and would not if they were permitted to save in a deposit account at the RBA.

            But if they are an unsecured investor (aka depositor) in a private bank engaging in money laundering and various other debt peddling product lines they should get a cut of the proceeds to reflect the fact that the bank may go broke (they tend to) when the public guarantee is removed after accounts at the RBA are allowed for the general public.

          • 86 year old mums will do fine. After all government taking care of them with b00$tirs….more concerning is Jeff Kernett was so moved by the homelessness he has recently witnessed on the streets near his local supermarket & disturbed at homeless plight of single mums…so much so he floated the idea of housing the single mums and their illegitimate offspring at the recently white elephant Ed (cos vexnation rates made everyone safe) Mickleham Resilience Centre: FMD

      • Display NameMEMBER

        Your unsecured loans to the bank (deposits) will be bailed in before any nationalisation will take place. The owners of our banks, in the US and the UK, will want their pound of flesh. Nationalisation will not deliver that.

      • But Chris Hedges reckons nothing will change until the ruling classes safety is threatened by an enraged population
        I think He is probably right,…18 mths away?

        No, it’s only if they’re enraged with them… if they’re enraged with each other it’s a different matter.

        • GonzificusMEMBER

          Isn’t that the media’s role? To keep the population fighting amongst themselves so they don’t realise who was the architect of their misfortunes.

          • Yep, that is why the war on Whites is so visible right now….

            The richest countries are being plundered and if you allow a bunch of racist ingrates to enter White countries, and build up their rage with false grievances, you’ll get to plunder a lot.

      • Jumping jack flash

        Everything can be fixed by “printing”, i.e creating more debt from nothing except the shadow of the preceding debt.

        Actual printing hasn’t occurred for quite some time and government and banker both really liked this arrangement.

  2. SkepticviewerMEMBER

    House prices will not fall – period. The mass importation of students, purchasing on behalf of the extended family soon to arrive and skilled Uber drivers from the sub along with wealthy escapees from SA and the UK making the true immigration rate of 800,000+ will ensure that every property is purchased. Multiple property-owning arrivals and safe haven seekers will see to that. Anyone who rings up any house on real estate will find every second listing is under offer. Without a no passport, no purchase policy, any thought of a price drop is simply dreaming. Currently, Australians have almost zero chance of owning a home even if they have cash. Tenants to foreigners are the destiny of Australians.

    • Display NameMEMBER

      The Chinese were by far the wealthiest students to come to Australia. They won’t any more in significant numbers. The students now will be mostly Nepalese and Indian. They will earn most of the money for Uni fees here and send money home. I don’t think students will have a significant impact on house prices any more.

    • Unless they are bringing new cash into the country (i.e. the Chinese) then they are relying on domestic credit to buy. More poor immigrants won’t save markets especially if they are on low incomes.

      Maybe a few rich saffas could come in with $$$ but that won’t shift the dial. As for the UK, I can’t see a dramatic acceleration from the immigration rates we have now and they are subject to similar/same monetary conditions in the UK. They won’t replace the Chinese who are done and dusted in my view.

    • Ha Ha Yep a German landlord with 4 bedrooms sublet to students in his family home (belongings & family photos of dogs & children litter the communal spaces) is outraged cos he can only get 2 desperate 40 something adults to rent rooms at $200 per week thanks to covid and students fleeing) Been in Oz 5 years & onto 4 th house between him & wife:)))) Plenty of folk doing same renting family home like a hostel

  3. pfh007.comMEMBER

    Crazed markets? Just because they think interest rates might rise higher than would be nice for deep in debt households?

    Are these the same crazy markets who for the last few years thought “bait rates” and more easy debt pumped into Aussie households, so they could chase house prices to the moon, was a good idea?

    Seems like the “markets” are just reflecting what happens when the consequences of a desperate and crooked 3rd term government trying to buy an election become crystal clear.

    Scotty ran the economy white hot while the RBA and APRA had a little snooze in the corner. Funny how they woke up within days of the election result……coincidence is the darnedest thing.

    And now we having the BOOM we had to have and the markets are reflecting that.

    A bit of geopolitical argy bargy is just making it worse.

    Black swans love that kind of bread crumbs which is why you don’t tempt them by stuffing your private and public sectors on price manipulated debt peddler product lines.

      • pfh007.comMEMBER

        It is amazing how little attention is being paid to the deliberate economic mismanagement of Scotty and Josh just to hold onto power.

        We need a royal commission into what the RBA and APRA were doing throughout the last government.

        It is just unbelievable that Governor Phil only noticed that inflation might be a serious problem in the last 4-5 weeks when unemployment was heading towards 4% and beyond for the last 12 months.

        The excuse that he was waiting for wages growth to appear is just horse poop.

        When has ANY central bank adopted a wages growth target as a reason for holding interest rates at extraordinary levels.

        People moaning that rates are now rising and calling out the RBA for now moving are missing the point.

        What they were doing while Scotty was running the joint is the issue.

        • There are ex RBA insiders that are also demanding and enquire into recent decisions wrt the running of the RBA
          Peter Tulip comes to mind. He has been pretty vocal since both he and his technical team were shown the door.by Captain Phil.
          https://www.cis.org.au/publication/structural-reform-of-the-reserve-bank-of-australia/

          However, knowing Peter Tulip’s background and training I’m not so sure that you’ll be any more comfortable with a DSGE model driven policy, even if you include all the modern BoE and Philadelphia FED add-ons (think it’s called PRISM2)

        • The RBA was just following markets and the other central banks. Yes Phil said some dumb sh*t about 2024 but he was just parroting lines put out by the Fed.
          APRA however failed completely and spectacularly. They did nothing even as bank lending exploded beyond anything seen historically. Their failure was total.

      • Know IdeaMEMBER

        It could be the power generators are simply flexing a little to remind the new government about who sits where in the hierarchy. This suspicion of course being predicted on the previous government knowing full well who was in charge.

        • Absolutely.

          Having said that the government will step on the energy sectors neck the moment energy bills become suburban BBQ conversation.

          Politics requires us to be patient. The prolls havent had big power bill rises yet. It is coming and then all will scream blue murder, labour will stigmatised the gas and coal sector and voila well have dom res done and dusted. All before the end of 2022.

  4. working class hamMEMBER

    When a loaf of bread is $10, diesel is $3.50 a litre and it costs 600k and 2 years to build a house, a million dollar mortgage will seem reasonable.

      • Jumping jack flash

        They stepped on the economy’s neck before wages could benefit from the price inflation. How else do wages get generated and paid in this kind of economy of services and retail of imported goods paid for by debt spending??

        Its pretty much 2007 all over again, but with less manufacturing and more debt.

        • Well what did you expect? That once the Gerry Harvey’s and the Alan Joyce’s of the world got their cut that they were going to trickle it down to the pleb to keep the debt cycle going??
          What in the last 10 years made you think that they wouldn’t just cut and run with the short term $$??

    • DingwallMEMBER

      $1m mortgage….. pfft ….. this is Australia mate….. in short time, you will have those prices AND $4m mortgages ……. house prices will be driven higher as immigration gets ramped to sort any problems out. It is the main solution to all our woes apparently

  5. But see, at some point the risk free rate (govt bonds) needs to reflect the premium of the risk in the nation. I am not sure what has sudden woken up the markets to assess aus for what it rely is, high risk due to high debt.. but these rates are completely reasonable for the state of the nation.
    We can’t even guarantee electricity through winter, hospital are depleted, slave wages are rampant, households in heavy debt in an unproductive asset, monopolies in energy, financial services, mining as far as the eye can see, corruption on the rise. These aren’t typically first world problems.

    I am not sure if you are arguing that these rates aren’t real because the rates put the nation’s people in its place (bankruptcy) compared to the premium in other countries for the relative risk taken there.
    OR whether these rates are really not warranted for the presumably lower risk aus is compared to the other nations now lifting rates and offering a better premium. The latter is the stronger argument. But only if you can make it.

  6. Australians are entitled to borrow as much money as they like at 1 percent interest rates , and no australian can ever suffer any negative consequences of this, everyone can win all the time.
    Energy needs to be free because it doesnt cost anything to build the infrastructure , there is no risk premium and wind and solar are going to give us all free energy anyway.
    FMD

  7. reusachtigeMEMBER

    Thank you so much for linking everything back to the housing market! We’ve been talking about youse guys at the parties and really want to invite youse along. Youse are doing a bang up job! Much appreciated.

  8. Philip Lowe on 7.30:
    “Well, yeah, I told people to buy houses, and those people are now stuffed; but hey, we also gave billions of dollars to rich people who don’t need it, so, when you look at the big picture, it’s all good.”

  9. MathiasMEMBER

    > If they came to fruition, Australia would experience its biggest house price crash in 100 years and the economy would be thrown into a depression.

    Yeah… and how would that affect me? Cheaper housing sounds like a lesson thats been long in the making and frankly, I can live in the bush for the next 5 years if it comes to that.

    The way I see it, the young have there life ahead of them. The Boomers are going to be well and truly fcked ;p

    Bring it on.

    • All the fake growth of the last 30 years will disspear. The banks will go broke. Societal expectations will be reset.
      It happenned in the 1890s.

        • Not when you have three people to support, have a mortgage, etc. I’d rather not live on baked beans for the pleasure of “removing a parasitic burden”. I’d also rather more people read my work than less.

          If a catchy headline is the price to pay, so be it.

          • Yes it will be terrible for the debt slaves like yourself, but this financialization of everything is a war against the people. Inequality always leads to revolution. So while a repeat of the great depression looks bad, it’s got nothing on the french revolution for suffering. Times will be tough, but that’s better than apocalyptic. The good times create the bad and vise versa.

    • I concur, please move on MB.
      And you are right TTP, I can’t see any change in behaviour atm. Was in the CBD last Monday (public holiday) and department stores were full and people were frantically buying. I was stunned by the spectacle. So much for crashing house prices and increasing IR and energy prices.

      • Why would we move on? Interest rates and energy are the two biggest issues facing the economy right now. Of course we are going to track it.

        These types of articles also generate by far the most traffic, which tells you how it is front of mind to readers.

        But yeah, we should ignore it, obviously…

        Chadstone shopping centre was dead last Friday night when I saw Top Gun. So by my single anecdotal observation, consumers have already tightened their spending. Whether it’s true or not is another matter.

        • I commend MB for pointing out the folly of low IR without implementation of macroprudential measures. No-one (that mattered) listened. The banks didn’t even worry about their own balance sheets – so now that house prices are coming down what’s the problem? A lot of your commenters are chomping at the bit waiting for the carnage and I sense some are worried you are jinxing the process by writing about it.
          The real issue is that your readers are intelligent and can see past the sensationalist headlines of your articles and that is insulting. You don’t need to do that. As I recall the other day you wrote house prices “TUMBLE” and the supporting stats showed prices for Melbourne only dropped .07% for the week I think. I am not a statistician or even mathematically inclined but I would say such a move over such a small sample is insignificant.
          The other point is your focus is always on the housing market or the fall out on the housing market. $4T to be wiped off housing market. Again, so what? For 80% of Aussies it matters not if their house is worth $660k of $1M because they are never selling or they buy and sell in same market. A falling market is only an issue for banks, investors and recent buyers.
          Given that your focus is on IR, I find it curious that few if no articles are devoted to what the fall out is for the stock market – which has come back 20% ( a lot more than the housing market) and yet no tears are shed for stock holders. Through their super many more ordinary Aussies are affected by a falling stock market than housing market especially given the fact that just about every super scheme is now a defined contribution rather than defined benefit scheme. Very little time was devoted to the fact that many conservative punters who parked their savings in Interest bearing accounts were ‘forced’ to buy dividend yielding stocks – only to see values truely SMASHED over last few weeks.
          So, whilst I really very much appreciate the efforts and enlightenment that you and David have provided over the years please watch the headline hyperbole and consider that perhaps your readers may be experiencing housing mania fatigue.

          • “The real issue is that your readers are intelligent and can see past the sensationalist headlines of your articles and that is insulting”.

            It’s called business, mate. If you put a bland headline it doesn’t get picked up by search engines, traffic suffers, as does revenue. I’d rather more people read my stuff than not.

            Blame Google.

            We’ve gotta earn a living too. If people are happy to pay $400 for a sub, we’ll stop with catchy headlines.

            “Please watch the headline hyperbole and consider that perhaps your readers may be experiencing housing mania fatigue”.

            Housing articles get the most views by a factor of 10. Suggests there is no “housing mania fatigue”. That’s what people care about, for better or worse.

          • The Wizz of Ozz

            Lol you still have stocks add another 10% to your loss . mine were converted 12mths ago to our masters dollars.

          • BornwildMEMBER

            Mate, you honestly think 4T wiped off the housing market is a “so what?” I think you are totally underestimating what such a decline would mean for a lot of people – this is not just an issue for banks, investors and recent buyers.

          • Mate, you honestly think 4T wiped off the housing market is a “so what?”

            Do you think the $4T of unearned capital gain on the way up is “so what’ either? It came and manifested a different type of suffering

            I think you are totally underestimating what such a decline would mean for a lot of people – this is not just an issue for banks, investors and recent buyers.

            Or as I said, there has been a lot of suffering on the way up… time for others to suffer.

            Then when everyone is at the bottom, they can all reflect on what is a proper way to run a property market.

          • BornwildMEMBER

            @rusty penny I don’t think my reply implied that property increasing by 4T was a ‘so what’. We are staring at two huge problems… a massive bubble was created and it will now deflate. Unfortunately not many will come out of this relatively unscathed – there will be a lot of collateral damage. For example, if banks end up in trouble – what will that mean for consumer and business lending, jobs, stocks and superannuation etc

        • I'll have anotherMEMBER

          Write what you want Leith. Journos shouldn’t be dictated to on what they write about. I’ve learnt a lot reading your articles over the years. Keep up the great work.

      • It’ll be a slow burn, just inconvenience at the moment. We’re still 4 to 6 months behind the US.
        When they hear house prices down 10%, and the 22c fuel excise comes back it’ll start to get real.
        Need to watch revolving credit, and BNPL defaulting
        Patience grasshopper.

  10. Welcome to the currency war! Instead of trying to devalue their currencies to make exports more competitive, the world is now competing for scarce resources and so are trying to lift their currency by lifting interest rates keep prices under check. Welcome to stagflation hell!

    • Exactly right, MB seems to pay scant attention to this.
      Energy price issues in the medium to long term will be solved by an increase in supply, a recession will only dampen prices short term, thats the historical pattern.
      Edit, a sustained period of high prices is neccesary to facilitate the increase in supply “the cure for high oil prices is high oil prices” is the old saying with the reverse also being true.

    • Imagine what a bunch of self-flagellating bunch of losers we have become if Australia is having to compete for resources…..

      Remember when “recessions are the time to by”…..

      This is the time we assert our dominance.

      • It is kind of stupid given the amount of resources we export,
        However we are where we are , and people have been mostly happy with the status quo , taking a more nationalistic approach to resource management is a major paradigm change . As we stand now the RBA needs to keep the AUD from falling too far or everything we buy becomes more expensive.

    • Someone forgot to tell Japan.
      Cash rate (-0.10%) and currency is spinning around the toilet bowl.
      Interesting given they import almost everything…..Hmmmm.

      • Thats a good point, Japan mostly imports raw materials though, then value add and export, i think there food self sufficient, and i guess could ramp up nuclear quicker than most.
        So i assume what they lose in energy price rises they gain in exports of value added items.
        I reckon wage inflation will be a large factor in the price of value added goods going forward, as de-globalization, aging population (esp. China) pushes up the price of everything manufactured

        • Nope Japan is the worst country in the world for food self sufficiency at 37% of calories produced domestically. Australia is 200% for grains, and we have spare kangaroo for pet food!

  11. Ronin8317MEMBER

    It’s been over a decade, but people need to recall what happened during the GFC (or if they’re older, the “Recession we need to have”). Business credit dried up, banks are foreclosing on loans even when repayment is made, and the big companies like Woolworths and Coles stretched out their payment to 120 days, using their small suppliers as a line of credit. There will be carnage everywhere.

    • What is coming will make the recession we had to have look like a walk in the park. Don’t know if the markets are right or not but even getting to 2.5% will hurt a lot.

  12. Jumping jack flash

    The biggest slap in the face for “battlers” will be when the banks – with 60% of their loan books attached to property prices inflated by their own debt, get bailed out because they’re TBTF once the debt spending vanishes, and along with it, the jobs and wages it supported, causing defaults and LVR devaluation simultaneously.

    At that instant if there is not a national uprising then we have all gone soft.

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