The mortgage apocalypse begins

Shane Oliver of AMP Capital has rung the bell on mortgage stress, warning that people who have recently taken out a home loan face escalating repayments as interest rates soar:

“Those who took fixed rate last year may not feel the pinch yet, but still it’s going to be really painful for those who got in recently”.

“I think there’s a group of around 25 per cent to 30 per cent of borrowers who will see a substantial rise in mortgage repayments, particularly recent borrowers, and they’re probably more at risk. They’re probably facing mortgage stress in the next three to six months”.

“It will take a little bit longer to show up through forced selling, depending on how quickly the Reserve Bank raises interest rates, but some will be starting to worry about it.”

RateCity research director Sally Tindall likewise warned that Tuesday’s 0.5% rate hike was merely “a taste of what’s to come”:

“The RBA wants to get the inflation genie back in the bottle and it’s prepared to do what it takes to get the job done, and quickly,” she said.

“While many borrowers have been preparing themselves for rising rates, they may not have expected the RBA would go this hard and fast.

“If you don’t think you can keep up with hikes of this magnitude, take action now. Start making cuts to your budget and consider refinancing to a lower rate while you can”…

Analysis from RateCity.com.au shows that if the cash rate hits 2.10 per cent by the end of this year, someone with a $500,000 mortgage today could see their monthly repayments rise by $542 in total.

For someone with a $1 million mortgage, repayments could soar by a total of $1083.

Before Tuesday’s interest rate decision, the median economists’ forecast was for the official cash rate (OCR) to peak at around 2.5% mid next year.

The futures market is even more hawkish, tipping the RBA will lift the OCR to around 3.5% by May 2023.

Rate hikes of this magnitude would engineer the biggest proportional rise in mortgage repayments in Australia’s history, adding to household’s cost of living pain.

To illustrate why, consider the next table showing the average monthly repayment on the median priced dwelling across Australia, assuming a 30-year principal and interest variable rate mortgage and a 20 per cent deposit. The figures for May are before yesterday’s 0.5% OCR hike.

Forecast mortgage repayments

If the economists’ forecast comes true, and the OCR rises to 2.5%, then the average monthly mortgage repayment on the median priced Australian home would rise by $781, or 28%. Borrowers in Sydney would be most impacted, with monthly mortgage repayments on the median priced home jumping by $1,163.

If the futures market’s forecast comes true, and the OCR rises to 3.5%, then the average monthly mortgage repayment on the median priced Australian home would soar by $1,174 (42 %), with repayments across Sydney ballooning by $1,748 a month.

The impact would be even more severe for borrowers that took out a fixed rate mortgage during the height of the pandemic at rock bottom rates below 2.5%. These borrowers would face a doubling or tripling of mortgage rates when it comes to refinance in 2023 and 2024, depending on whether the economists’ or market’s OCR projection comes into play.

Given Australian house prices soared around 35% over the pandemic on the back of deep cuts to mortgage rates, heavy price falls would necessarily ensue from the sharpest lift in mortgage repayments in the nation’s history. Interest rates are a double-edged sword.

At the beginning of the Global Financial Crisis in 2008, the RBA mistakenly hiked the OCR by 1.0%. After the economy teetered and house prices began to fall, it was forced into a sharp reversal whereby the RBA slashed rates by 4.0% over just six months.

We see similar happening again after the RBA goes too hard on monetary tightening. Don’t be surprised to see the RBA once again cut rates aggressively in the second half of 2023 to counter deep falls in house prices and a recession.

Unconventional Economist

Comments

    • pfh007.comMEMBER

      Yes, it is a more accurate statement.

      Have you noticed how all those people who claimed that the RBA was a lunatic for not gutting interest rates fast enough into the pandemic are now desperately insisting that the RBA should ignore inflation?

      Those monetary policy fanatics bear a lot of responsibility for any families feeling pain over the months ahead.

      Central banks will respond to inflation as sure as night follows day until they are satisfied that inflation is not a problem.

      Insisting they must ignore inflation is just monetary policy fanatic mad ravings.

      • reusachtigeMEMBER

        Yeah like those loonies who run this blog! I love those blokes for fighting the battle to protect house prices!! They are great foot soldiers.

    • Strange EconomicsMEMBER

      Shane Olivers obvious solution is his other articles -on “More immigration quickly”.
      The real problem is not mortgage stress as the house price is up 100%, its rental stress.
      But never mind, immigration will pump rents and house prices up and the mortgagees won’t care as they get 10% more price each year, and only 1% in extra interest.
      – They have short term debt and long term 10% per year profits- good deal.
      Renters don’t count for the property owning classes.

  1. A few months ago (or maybe a bit more?) we were told that rates won’t rise until maybe 2024 or something, rates were kept really low, everyone apparantely had excess savings beyond the records ever held, all the lenders were stress testing recent borrowers way above what could ever be possible (especially as rates weren’t going anywhere until at least ……?), inflation was a see through thing that wasn’t actually happening because it was all non demand pull driven….(blah blah), so nothing to see, wages aren’t going up so no big deal, etc etc etc.
    So what went wrong?
    Why did RBA keep rate at 0.1% for so long? Actuall why did they ever get to as low as 0.1% in the first place? (this has nothing to do with Russia & Ukraine, it was upon us way before that started.)
    As soon as there was EXORBITANT ASSET PRICE INFLATION why didn’t the RBA, APRA, Government not think there was a reeally really really serious problem? Why did everyone let the banks keep on lending into a ridiculously obvious insane market?
    Everyone knew this was coming lets not pretend it wasn’t obvious. So why did it get to be allowed to happen?
    What will be even worse is what happens next, as it probably is a massive kick the can down the freeway..!

    • Leroy Huggins

      The behaviour of Western governments and reserve banks make much more sense if you understand they are operated with intent to harm, not protect. Not that this is always the intent of every individual involved, many are true believers and believe what they do helps, but the ideology that fills their minds, and delivers them their blindspots and pathologies, has been supported by people that know the results that follow. The conspiracy against the people is real, and is mostly carried out and enabled by useful idiots.

      • Strange EconomicsMEMBER

        Don’t think their plan is to harm in their mindset – but consider their sociology of their Point of View – that the model makes most sense is that the policies are to benefit the people like them, the top 10% and 1%, which is the milieu and society and education of the bank execs.
        The other 90% are not encountered, and are to be given enough to keep them from rocking the boat.

      • They’ve all sworn by the Hypocritic Oath of ‘Do mo’ harm’

        I don’t know what they want from me
        It’s like the more money we come across
        The more problems we see

    • Agree. Interest rates should never have been dragged so low. RBA should never have said they would keep them there.

    • pfh007.comMEMBER

      “ Why did RBA keep rate at 0.1% for so long? ”

      Because they were under enormous pressure from monetary policy fanatics who insisted that lower rates were a good idea.

      What reasons did they give?

      Cheaper bank credit would drive demand for bank credit

      This would support house prices

      This would put downward pressure on the AUD.

      A lower AUD would make exports cheaper

      Cheaper bank credit would allow business to invest in higher productivity.

      It was ALL horse poop as it was always inevitable that without supporting regulation that cheap bank credit would produce a bigger housing bubble and a new bunch of punters vulnerable to getting crunched the moment inflation appeared.

      • The Travelling PhantomMEMBER

        Exactly!! Their fight should be with APRA not RBA…
        They are addressing the wrong address
        Instead all this energy fighting the Fed (RBA) they should be writing articles all day about that just like the campaign against gas cartels and tge Chinese base in Solomon Islands

        • pfh007.comMEMBER

          They used to write articles about APRA until it was pointed out that APRA is not concerned with whether credit is used for productive purposes (this is what deregulation was all about because bankers know best) but the health of financial institutions.

          Provided the government stands ready to save their bacon they can blow bubbles all day.

      • Strange EconomicsMEMBER

        But their was no bubble , no bubble! It is just a permanently higher price going up forever in their models.

        10 times income loans for 1 million are not a bubble, (nor are even if 20 times income loans ) until interest rates go from 1 to 3% and use up 60% of a couples 100k after tax income, and suddenly holidays and new cars are off the table.
        But house prices still go up 10% a year, so its a cash flow problem.

  2. Hugh PavletichMEMBER

    UPDATE … New Zealand housing market indicators implode …

    Foop (Fear Of Over Paying) alert: Buyers worried by ‘faster than expected’ house price falls … Susan edmunds … Stuff New Zealand

    https://www.stuff.co.nz/life-style/homed/real-estate/300608852/foop-alert-buyers-worried-by-faster-than-expected-house-price-falls

    New Zealand’s housing market has softened faster than anyone expected, one economist says – and it could be the middle of next year before buyers shake off a fear of overpaying.

    Tony Alexander runs a regular survey of licensed real estate agents throughout New Zealand, asking them about the conditions of the property market in their areas.

    He said it was noticeable that a fear of over-paying, or FOOP, had taken hold. Now, 73% of agents were seeing it, compared to 19% in October. … read more via hyperlink above …

    … following …

    New Zealand housing market indicators implode … Leith van Onselen … MacroBusiness Australia

    https://www.macrobusiness.com.au/2022/06/new-zealand-housing-market-indicators-implode/

  3. Vivian DarkbloomMEMBER

    > Interest rates are a double-edged sword.

    Here we go again.

    @Leith, you keep using this phrase as if to suggest that the fall of asset prices in response to rising interest rates is somehow a negative or even unexpected effect. In a fully financialised, debt-fueled economy where demand is largely determined by the cost of debt funding, this is neither surprising nor undesired but the intended outcome.

  4. Yesterday I pointed out that the only banks that correctly forecast the half point rate rise were all offshore institutions. I also speculated that local institutions would have had reluctance in at least some instances, to predict a half point rise even if that is what they thought, in order to avoid being seen cheering on big rate rises.
    Then yesterday a report in The Age about a speech former Reserve Bank governor MacFarlane gave about rising rates. MacFarlane correctly said interest rate policy should not be solely focussed on the interests of marginal borrowers.
    The article said that some banks only forecast a quarter point rate rise in order to protect its marginal mortgage holders. So there you have it, some of the forecasts have an agenda. Remarks about what the average rate increase forecast is, as assessed by economists, some of whom work for banks, should be looked at as pushing an agenda in some instances. Not seen as a pure forecast based on the state of the economy.

    • Arthur Schopenhauer

      What percentage of borrowers are marginal? Of the general loan pool? And of the adult population?

      There are many who “own” their homes, but have a large investment loan “portfolio”.

      Is this data available anywhere?

      • Strange EconomicsMEMBER

        Maybe 5% have bought in the last 10% price rise and have risk of negative equity.
        Marginal buyers are critically needed to support the housing Ponzi scheme to keep going up, so they have to be encouraged.

        • rob barrattMEMBER

          Where is Charles Ponzi when we need him? Renters to tent cities, turn on the giant immigration valve I say……

      • Start with EVERY FHB who took out a Scummo 95% (or 98% if you are a single parent) LVR loan.
        Not sure how many but there will be a lot? Most likely they are significantly first generation migrants in places like Tarniet.

      • As for the cross collatoralisation question… I don’t think anyone really knows but my guess is there is a LOT.
        Bank of mum and dad which is really just equity release. Every ‘savvy investor’ has cross collatoralised.
        I think this is the ticking timebomb and my guess is the banks themselves don’t even really know how much risk is there.

    • In Ian Macfarlane’s piece in the SMH yesterday he insinuated that the banks were stating IR rises would be lower than the financial market predictions because the banks want them to be lower!

  5. reusachtigeMEMBER

    Something needs to be done, and will be done, to protect mortgage owners! I hope they transfer idiots large bank accounts of useless capital into people’s mortgages where it is needed! I’d say that will be what will happen and will help free up locked away capital.

    • Jonathan Rubenstein

      I know what will be done: The government will buy all the bad mortgages and write them off with newly printed money.
      This will free up capital for another boom.

    • That’s a given, but it leaves one pondering the question: And then what?
      The long term solutions are either simply accepting neofeudalism (actually we need to be embracing it and anointing it as our new shared religion).
      Or finding ways to properly reward labour (measured as a percentage of house values).

      What’s the old socialism joke: The problem with socialism is that you eventually run out of other people’s money”?
      bit like stealing someone’s savings and expecting them to replace the stolen money so that you can do it again.

  6. Hello from WA. I’m enjoying the lights being on and the gas heater running on high. 😀

  7. The average punter who bought in the last year or so doesn’t read blogs like this. They get pressure from parents, friends & MSM about borrowing as much as you can and getting on the ladder. When it comes to experts they would listen to the RBA. So where is the accountability on the claim rates wouldn’t rise for years. Firstly for being so misleading and secondly for a board to even make such claims in the first place.

    • The Travelling PhantomMEMBER

      I agree, there was no week passed over the last 2 years asking me have you bought? You still renting? What’s wrong with you?
      etc…

    • Mike Herman TroutMEMBER

      This is very true. I read this blog daily and during the boom last year it still took everything I had not to jump in and buy something. The pressure was immense. At times it felt like I was making a terrible decision and that process would continue to go through the roof, pricing me out forever. Some of the commenters here helped me immensely to not fall in…. I’d hate to be sitting with an 800k mortgage right now….

      • Vivian DarkbloomMEMBER

        > I’d hate to be sitting with an 800k mortgage right now….

        Compared to a whole lot of recent buyers, you’d be able to count yourself lucky to sit with ‘only’ $800k of debt.

        For what it’s worth, the Sydney market has been cooling, pretty much in a linear fashion, since March 2021. In an economic environment condemned to needing eternal growth to be able to exit the investment net positive after stamp duty, money renting, agency commission, etc. the writing has been on the wall for well over a year, and now it’s time for the unavoidable pain.

    • Magnus MaximusMEMBER

      Can confirm. A lot of pressure from the parent front to buy “as soon as you can”, “rent money is dead money”, “stop paying someone else’s mortgage”, “ignore the news prices always go up”

    • People have cottoned onto the CBA lending volumes over the pandemic equating to mega levels of risk.
      CBA will be sitting on the mortgages of a lot of those ‘marginal’ borrowers who have bought in the last 2 years.