Banks, market to crash Aussie house prices 25-30%

On Friday, Westpac joined ANZ in raising its official cash rate (OCR) forecast to 3.35% by February 2023.

This means Westpac expects the Reserve Bank of Australia (RBA) to hike the OCR by another 2.0% over the next seven months. It would also mean the OCR will have risen an extraordinary 3.25% over just nine months – by far the most aggressive pace of monetary tightening in Australia’s history.

Westpac and ANZ’s OCR forecasts are roughly in line with the futures market, which now tips rates to hit 3.35% by year’s end before peaking at around 3.65% in March 2023:

Futures market interest rate forecast

Futures market is still forecasting extreme interest rate rises.

AMP Capital’s chief economist, Shane Oliver, is less hawkish. He forecasts the OCR to peak at around 2.6%. Even then, Oliver expects Australian dwelling values to fall 15-20% peak-to-trough, with Sydney leading the correction.

However, Shane Oliver warned via Twitter that “money market expectations for a ~3.5% cash rate could push this to a 25-30% fall”; although the extremeness of this price crash “probably means rates won’t go that high”.

I agree with Oliver’s assessment that ANZ’s, Westpac’s and the futures market’s OCR forecasts are far too hawkish. If true, they would lift Australia’s average discount variable mortgage rate to between 6.8% and 7.1%:

Projected mortgage rates

Mortgage rates to double.

This would represent a doubling of the 3.45% average discount variable mortgage rate that existed at the end of April 2022.

The impact on mortgage holders would be financially devastating. Under the market’s forecast, average principal and interest repayments would soar by an extraordinary 51%, representing an increase of $1,129 a month on a $500,000 mortgage:

Average mortgage repayments

Mortgage repayments to rise 51% in only eleven months.

The impact on the Australian economy would be equally destructive as the extra mortgage repayments, in addition to plunging house prices, would sap household consumption spending – the economy’s major driver.

For these reasons, I doubt the RBA will hike rates nearly aggressively as ANZ, Westpac nor the market are forecasting. Rather, I see the RBA reversing track next year and cutting rates to ward of recession.

I hope I am right. Otherwise the Australian economy will be in deep trouble facing an unnecessary recession and the biggest house price crash in living memory.

Unconventional Economist

Comments

  1. ParraPowerMEMBER

    It will help first home buyers. The property market in Australia is not a steroid. It needs a great reset.

  2. Quantitative FleecingMEMBER

    Love how ANZ and WPac can forecast this but not a peep from NAB (Not A Bank) and CBA (Corrupt Biased A**holes) who are still in denial because they know how completely f****ed they are with all the dodgy loans they approved.

    Time to get the popcorn out. 🍿 I look forward to more bankers fainting on the stand while they’re being investigated in a few years time.

    • NAB have upped end year to 2.85 percent. Westpac in their latest update although upping the terminal rate now “forecast” 100bps cuts in 2024. Remembering that the banks only goal is to maximize their profits how they obtain them is of little consequence.

      • happy valleyMEMBER

        And will Westpac’s mooted 100bps drop in the cash rate by the RBA in 2024 be enough to stall the crash or should the bookies be starting their books now on which will be the first of the Strayan banks to hit a wall?

    • The fact the you truly believe that NAB and CBA haven’t made calls on rates given MB published the CBA outlook makes your comments utterly ridiculous. I don’t own a house and would love to be able to buy one, however you are delusional if you think you will be in the box seat if property prices drop 50%. The economy will be stuffed, and no one will be able to buy….watch your cash being bailed in. Be careful what you wish for. You are not the only one in the comment section on MB that doesn’t seem to be able to put this together.

        • maybe….he has shown with the gas issue that he isn’t really on the side of the Australian punter. Interest rates are a global issue so the RBA is powerless. Our banks rely on the kindness of strangers who don’t give a rats about Australians. Albo can only open the immigration gates which he will most likely do.

          • happy valleyMEMBER

            But it doesn’t seem like many foreign “punters” are falling over themselves to come and be part of the great Strayan dream? What carrot(s) can Albo offer? Come and you’ll be given PR on arrival?

      • Quantitative FleecingMEMBER

        It’s more a form of gentle trolling to get replies than a serious analysis. I don’t believe I’ll be in the box seat for anything no matter what happens. And I’m certainly not going to be cheering when unemployment is through the roof or there are bail ins like you’re saying. I’m just tired of the can being kicked down the road again and again while the economics of house prices in the stratosphere slowly eats away at the fabric of society, wealthy getting wealthier, poor getting poorer and the middle class being gutted. The crisis is already here whether there ends up being a financial crisis or not. Something has to change though.

  3. TailorTrashMEMBER

    Well Birchey boy ain’t phased ……..only 20 million to service at those doubling of rates ……..no probs just jack up the rents
    ……..hope his tenant s go all Chinese and go on a rent strike

    Note on the shelf behind him a monopoly game and a skittle ……..which is it to be of Birchey boy ?

    https://youtu.be/tPHAv6j334o

      • Vivian DarkbloomMEMBER

        The question is whether he’ll be able to afford that insurance on renewal. If he even has it, that is, because money spent on insurance is money not spent on another deposit.

    • 20% on the way up is not equivalent to 20% on the way down.
      Back to year 4 maths you go.

  4. “the biggest house price crash in living memory” as apposed to the the biggest house price bubble in living memory?

  5. Diamond Hands

    the banks turned more hawkish because they have access to their customers spending data (credit card transactions) which can be used to fairly reliably forecast inflation rate – looks like the next print is going to be a shocker. and let’s not forget that 30% housing drop will take us from the biblical bubble level to just extraordinary bubble level.

    • Quantitative FleecingMEMBER

      Just remember the rules:
      40% Up = Boom
      Up = Cooling market
      Down = Negative Sideways Movement™
      40% Crash = Correction™

    • Jumping jack flash

      Agree.
      In my opinion they already had started with this path and then for absolutely no reason they decided to raise interest rates. WHY? was it Russia? China? There’s just no obvious reason for it.

      Debt eligibility has 2 parameters and only one of those is interest rate. The other is income.

      Prices create revenue. Revenue creates wages.
      Raising minimum wage will ripple up all the way to the top to inflate wages. And its all kicked off with a couple of trillion stimulus dollars… in the name of COVID.
      And the debt keeps on growing despite zero interest rates.

  6. Jon BovardMEMBER

    But Leith you repeatedly said the futures market was mad and this will/would never happen?

      • RBA aren’t going to get that high…..there is maybe 150bp more & rates are coming down from Oct Nov into next year
        Prices will be crashing with the banks
        But you are going to see min 1989 interest rates 17% & higher maybe 25% over the next 5 years
        Why Brrrrrrrrrrrrrrr
        Prices will be down 50 to 80% over this decade, some more than 80% lower

        • Jon BovardMEMBER

          The futures market and 2 of the 4 big banks think otherwise. The audience of yay sayers is growing it seems.
          “this ship can’t sink”

        • I look at the US being 30% down in the GFC and think that most places in Australia are much nicer than most of the US. People want to live here and because we allow laundered money to buy property, that will put a floor on how low it can get. If foreigners sniff a deal, they will shuffle money to our shores.

          • elasticMEMBER

            Fortunately housing markets across the globe are all going to be suffering so hopefully our bargains won’t appear that way

        • Jumping jack flash

          Why would the banks keep crashing if they start lowering interest rates now?

          Theres still trillions of stimulus dollars in the economy poised to be leveraged into more debt.

          • Same reason Covid is not front of mind even though record number of people are dying from it. Sometimes there are opposing concepts that exist together

      • 2023HomelessMEMBER

        Perhaps think of it the other way…how many times have the RBA made errors? More often than not of late? So actually, it’s likely they will just stick to form, and make the wrong call again.
        So I back the markets, and the RBA to stuff up, again.

        But two wrongs do make a right for the RBA. Ie. Rates too low, rates too high…property market back where it should be.

        The plus is a whole lot of people felt rich and investor savy for 6-12months. Which is nice of the RBA to give them that experience. Lol

      • Problem is, Captain Phil seems to specialise in monumental policy failures. 3yr YCC blew up in his face – which was perfect for me as I was in London meeting my HF clients and they were amazed that the RBA could be that stupid (made great talking points). Then there is the; no way we raise rates before 2024 and futures markets are barking mad.

        Debelle has jumped ship (or was he pushed ???) and they’ve rushed out reviews of everything to try to condition the battle field ahead of a review. That review will probably not yield much, but the fact it’s happening speaks volumes.

        • happy valleyMEMBER

          Debelle will be proven to be the smartest person in the room – he exited the sheltered workshop earlier this year before the serious rate hikes started, to take a “do you want to be rich offer? from Twiggy organised through Debelle’s uni mate ex-NAB banker Hagger, who’s been working for Twiggy for a few years now.

    • Quantitative FleecingMEMBER

      No I distinctly remember he said that the lunatic RBA would go full Death Star and blow up the house price galaxy

  7. Camden HavenMEMBER

    Subject to the caveat, ceterus parabus, yes but this is not possible in the real world.

    How will Victorian debt default and fiscal cuts impact the model?

    • But are you counting the husband, wife and 2 kids macca’s job in the income calcs? The broker certainly did 🙂

  8. 2023HomelessMEMBER

    Interesting anecdote. A friend bought an apartment earlier this year. Already can’t pay the mortgage with another 0.5% rate rise. She called her father, a senior manager in a big 4 bank. Who owns about 5m in property. Turns out he also can’t cover his mortgages if rates rise much further….this was a person I was certain wouldn’t be impacted.

    Both are digging into budget spreadsheets to see if they can survive until rates fall, or if they cut their losses and sell asap.

    If this is any indication of others in the market. Things are about to go very pearshaped indeed.

  9. Policymakers will do what they always do, react to events that have already happened, and drive policy in one direction until something breaks.

    I was ultra bearish on rates end 2020 but now I find myself back on the dovish end of the spectrum. Im looking for three more 50s and maybe a 25, peaking around 2.75. But they could push harder as the economy has had a lot of momentum and Phil is clearly a guy who drives the car through the rear view mirror, so risk of a mistake is high. That said, it’s fine to start to receive long end rates here IMHO. AUD 5y5y around 4.25% seems a reasonable bet to receive.

    • happy valleyMEMBER

      Captain Phil is possibly already counting down the days to September 2023 when his current contract ends by when he figures the timing’s probably correct to exit stage right?

  10. I know a lot of cashed up boomers care little for those younger generations priced out of the market. The same ones who had free education, plenty of jobs, and relatively cheap mortgages. The same self-absorbed ones who sold their properties to overseas foreign investors and in so doing, pricing locals out of the market. I say burn this market to the ground.

  11. “It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank … are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:
    – the stability of the currency of Australia;
    – the maintenance of full employment in Australia; and
    – the economic prosperity and welfare of the people of Australia.”
    https://www.rba.gov.au/about-rba/our-role.html

    Raising rates will have some impact on the third point in it’s mandate (for the proportion of those that are overleveraged, but not really the 2/3 of the population that doesn’t have a mortgage). Not raising rates will destroy the AUD (as all others around us raise rates), and in turn mean inflation goes even more nuts as it is imported, which will affect ALL Australians. My money is on the market being correct.

  12. It is very funny to see the likes of Mr Joye hammering their same arguments day after day in the AFR to try and put pressure on the RBA. I hope the RBA stays strong!

  13. Leith I hope you are wrong.Recession is nature’s way of curing all ills arising from recklessness.It needs to run i ts course for the sake of our kids!