Following Tuesday’s ‘shock’ 0.5% hike in Australia’s official cash rate (OCR) to 0.85%, Australia’s futures market raised its interest rate expectations.
As illustrated in the next chart, the futures market is now tipping a 3.1% OCR by December and 3.9% by May 2023:
This is a sharp increase on last week when the futures market forecast a 2.75% OCR by December and 3.5% by May 2023.
For their part, economists have also revised up their interest rate forecast to a peak of around 2.75%, up from 2.5% previously.
Either scenario would be devastating for mortgage borrowers and the housing market.
The below table shows mortgage repayments at the end of May (i.e. before Tuesday’s 0.5% rate hike) and compares them against the economists’ and futures market’s OCR projections.
The analysis assumes a 30-year variable rate principal and interest mortgage on the median priced home, with the borrower stumping up a 20% deposit. It also assumes any increase in the OCR is passed onto mortgage holders.
If the economists’ 2.75% OCR projection comes true, then the average discount variable mortgage rate would lift from 3.70% at the end of May to 6.10% by mid-2023. In turn, mortgage repayments would soar 32%, or by $877 a month nationally.
If the market’s 3.9% OCR projection comes true, then the average discount mortgage rate would soar to 7.25%, hiking mortgage repayments by 48% or $1,336 a month nationally.
The impact would obviously be most severe in Sydney owing to its status as Australia’s most expensive housing market.
Australian house prices soared 35% over the pandemic on the back of deep cuts to mortgage rates. The flipside is that prices should fall hard as mortgage repayments soar.
In its most recent Financial Stability Review, the Reserve Bank modelled that a 200 basis point lift in mortgage rates would lower real house prices by 15% over a two-year period.
Based on this modelling, the economists’ 2.75% OCR projection implies a circa 20% real house price fall, whereas the futures market’s 3.9% OCR projection implies a circa 28% real house price fall.
Ultimately, the size of Australia’s housing bust will depend on how aggressively the Reserve Bank hikes rates. If the futures market psychos get there way, we will get a full blown price crash.
