Market throws Aussie housing under mortgage bus

Financial markets have gotten even more bullish on Australian interest rates, now tipping the Reserve Bank of Australia (RBA) to lift the official cash rate (OCR) to 3.45% by December before peaking at 3.75% by March 2023:

Futures market OCR projection

Markets predict extreme interest rate hikes.

If true, this would lift Australia’s average discount variable mortgage rate to 6.8% by December and 7.1% by March 2023, assuming any increase in the OCR is passed onto mortgage holders.

This would mean that by December, Australia’s average discount variable mortgage rate will have basically doubled in only seven months from its level at the end of April before the RBA commenced its rate tightening cycle:

Average discount variable mortgage rate

Mortgage rates to double in only six months, according to futures market.

In turn, it would constitute the biggest lift in mortgage repayments in Australia’s history, with principal and interest mortgage repayments jumping by 46% by December from their level in April:

Australian mortgage repayments

Mortgage repayments set to rise 46% in only seven months!

For a household with a $500,000 variable rate mortgage, this would represent an increase in repayments of $1,028 per month ($12,336 a year), whereas a borrower with a $1,000,000 mortgage would pay an extra $2,057 a month in repayments ($24,684 a year).

The impact on household finances would be devastating, pushing many into severe financial stress and forcing many households to cut their spending. This, in turn, would smash the economy, given household consumption is the biggest driver of growth.

House prices would also fall sharply. Under the RBA’s own modelling, “a 200-basis-point increase in interest rates from current levels would lower real housing prices by around 15% over a two-year period”.

Therefore, the market’s OCR projection would cause real Australian house prices to crash by around 25%, according to the RBA modelling.

Let’s hope the RBA does not follow the OCR path set by the futures market. Because if it does, household consumption and house prices will collapse, plunging the Australian economy into an unnecessary recession. And for what?

Unconventional Economist

Comments

  1. Jik the RipperMEMBER

    For what?

    To destroy 20 years of malinvestment caused by the mispricing of debt, so that all Australians can participate in the future prosperity it will trigger.

      • Its really quite odd seeing this current line of talk from Leith after the last ten years of the opposite. A little bit like phat Wolfie! Is it that the fund is exposed to the housing market? Because otherwise I cant understand the switch in logic. Does inflation no longer matter?

        • Dude! Balls of titanium!

          It’s like accusing your best mate that the reason he’s siding with his own wife is because if she’s banging him!

          It’s obvious, but prize-winning cojones for bringing it up!

    • happy valleyMEMBER

      Captain Phil doesn’t give a RAT’s. He doesn’t have a mortgage, he’s owned his “pile” in Randwick for 20 years and his pension entitlement for 40 years of turning up at the Martin Place sheltered workshop could be as much as $7m? What’s there to worry about?

      • “What’s there to worry about?”
        If I were the RBA I would be terrified that inflation escalates to let’s say 15% in 6 months. What’s to say it won’t get there after all the printing craziness? then how would I look?

        • happy valleyMEMBER

          Captain Phil is possibly just cruising between now and September 2023, getting through the independent review of the RBA so that he comes out smelling like roses and then hands over to whomever succeeds him.

          Did the RBA ever get started on its $250m refurb of the Martin Place ivory tower or was that delayed by COVID?

      • The Grey RiderMEMBER

        I’d be worried about the pi$$ed off proles who can’t feed their families. Think of something 10x worse than the Cronulla riots…then multiply that again for white hot rage.

        • Oh lol! I’ve said it in the past and I’ll say it again: as long as people are worried where are they going to park their car when they head off to the ‘gathering’ and whether they’ll be able to go early enough to pick up the drops from school, you won’t get anything like you’re hoping!

  2. Diamond Hands

    if young people in their 20s can’t have a roof over their head to start family and start having kids, Australia as we know it will no longer exist in a couple of generations. that is why house prices must crash and stay crashed.

    • Leroy Huggins

      If one interprets the vaccine policies that were implemented, and the immigration program ran over the last few decades this should be taken as the direct aim of the powers that be. It more precisely predicts their behaviour than any other motivation.

    • Oh, it will exist in name. Just fill in all the people who weren’t born with migrants. There won’t be any assimilation or cultural continuity though… I guess it begs the question: What is a nation?

    • By design: WEF: younger folk been & being primed conditioned & programmed to celebrate owning nothing & going nowhere cos carbon:

    • Strange EconomicsMEMBER

      And if house prices go down, investors will claim 35% as a tax loss. They win on the way up , leveraged by NG, and half capital gains tax rate, and don’t lose like FHBs on the way down.

  3. Quantitative FleecingMEMBER

    It needs to happen. Money printing and insane asset speculation got us into this mess from a decade of “stimulatory” monetary policy (aka BS economics).

    It’s time to let it all burn along with the reputation of the banking sector. I’ll be watching the BREAKING NEWS segment about the imminent collapse of the housing and banking sectors, sure to be on channel 9, and I’ll be watching on enjoying a nice Barossa Valley Shiraz w/ premium Aussie Wagyu that I can only afford because I cancelled my gas supply.

    • You’re an optimist if you think debt laden Ch9. will still be broadcasting. Those talking heads don’t work for free. They have Sydney mortgages to pay.

  4. Wait I just read this..
    Under the RBA’s own modelling, “a 200-basis-point increase in interest rates from current levels would lower real housing prices by around 15% over a two-year period”.

    What does that mean nominally? Nominally they are going to crash harder?

      • That doesn’t sound right.. hmm. Nominal = real inflation.
        So a real fall in 15% , if inflation is say 5%, then you have a fall of 15 and then also missed out on 5 that everything has gone up by.
        No?

  5. Let me get this straight, MB and Christopher Joye’s only arguments is to say that under RBA or Market rate path “the interest rate payments expressed in RELATIVE terms would be roughly around 46%”. But of course when you start from (almost) ZERO any number is going to look big when expressed in relative terms. This is a very weak argument, especially when you consider all the background context:
    -crazy printing/stimulus that lead to crazy inflation,
    -very fast hiking from the FED and other CBs
    This situation is simply untenable: if anything the RBA is way behind. Plus, life and world doesn’t revolve around aussie mortgage holders and their bad decision-making.

  6. Camden HavenMEMBER

    What therefore are markets pricing in?

    If Mr market sees 40$ iron ore banking in trouble and the AUD under pressure it’s conservative really.

    That everyone else is insane except me arguments are pointless

  7. I feel confidant that Leith’s prognostications are correct but the readership just keep cheering it on. Fkn funny in a way.

    • 2023HomelessMEMBER

      Wasn’t long ago MB was confident rates wouldn’t go over 1.5%. So which Leith prediction are you talking about? He’s already crab walked away from earlier predictions…

      But for his current view. I tend to agree. The market is too hawkish. But a 2.5% rate is pretty well guaranteed, maybe 3%.

  8. Even the laggards are upping the ante, Westpac “We have revised our profile for the RBA cash rate cycle to include 50bp moves in both August and September; followed by a step down in the pace to 25bp increases at every meeting from October to February 2023. The terminal cash rate forecast has been revised up from 2.6% to 3.35%. Under this policy stance economic growth is expected to slow to 1% in 2023 and the unemployment rate to lift from 3% to 4.4% in 2023. ”
    “Separately, National Australia Bank has boosted their forecast to 2.85% by year-end. ”
    I can feel the variable rate pain.
    The last thing the RBA needs is a collapsing currency alongside a collapsing economy .

  9. BoomToBustMEMBER

    If anyone thinks the market will only drop 15% they need to get their head read. You cannot double interest rates and only expect a minor drop in pricing. But add to this significant inflation issues and you are looking at real trouble.

    • 2023HomelessMEMBER

      Completely agree. When rates were going to rise to 1.5%, people were suggesting a 10-20% fall. So with rates near 3x that…people are suggesting it will fall 20-25%. Their maths isn’t great.

  10. I repost a comment that, unfortunately, didn’t get through:

    Let me get this straight, MB and Christopher Joye’s only arguments is to say that under RBA or Market rate path “the interest rate payments expressed in relative terms would be roughly around 46%”. But of course when you start from (almost) zero any number is going to look big when expressed in relative terms. This is a very weak argument, especially when you consider all the background context:
    -crazy printing/stimulus that lead to crazy inflation,
    -very fast hiking from the FED and other CBs

    This situation is simply untenable: if anything the RBA is way behind. Plus, the aussie economy doesn’t revolve around mortgage holders and their bad decision-making.

  11. Jumping jack flash

    The demand destruction will be monumental.
    I don’t think anyone actually realises that the New Economy operates on pure debt, and only debt.

    Howards’ economic miracle to get unemployment to 5% was only possible due to redefining “employment”, shifting long-term “unemployables” to the pension, and expanding demand with spending cheap debt. There was nothing amazing about it.

    Remove the debt, or even reduce the debt growth, and there will be no economy and we will quickly return to those fantastic days of double-digit unemployment despite Howard’s redefinitions. Almost all the jobs that exist and we are employed in are primarily for performing services, or retail of imported items, or perhaps performing services for retailers of imported items!

    Some people must have a lot of savings, perhaps they were winners in the New Economy and have bank accounts flush with piles of someone else’s debt? Spare a thought for where that debt came from. The people who actually own this debt will be the ones who will suffer the most.

    Why would employers need to employ people to service demand that doesn’t exist? Some people are oblivious to what the fallout of this event will be, if it is allowed to continue. I hope you all have your caravans and tinned food ready, and forget about “cheap houses” because unless you have the cash, or lucky enough to still be employed, you’re not getting the debt to get the houses with.

  12. Every time u write “record jump in mortgage rates” you should qualify it “as a result of the record jump in inflation.” It’s absurd to focus on mortgage rates. It’s inflation that are fighting. And don’t think they don’t know that the slowdown is coming. That’s exactly what we need and what The Central banks are all trying to design. They broke it now they own it.