AMP Capital’s chief economist, Shane Oliver, has released a podcast explaining why he believes the Reserve Bank of Australia (RBA) is close to the end of its monetary tightening cycle.
Oliver notes that “we’ve now got mortgage rates at early 2012 levels. We’ve seen over the course of eight months almost 10 years of mortgage rate cuts reversed. So, that’s a massive change in interest rates”.
Oliver believes the RBA will be reluctant to lift rates much further due to several factors.
“Firstly, global supply bottlenecks are continuing to dissipate. Reduced delivery delays, lower freight costs, and commodity prices are well off their highs… It’s now showing up in lower US inflation”.
“Yes, electricity prices have more upside. But if you look at oil and hence petrol prices, they look to have peaked and are now making a zero or negative contribution to inflation. And that is despite the rebound in the fuel excise in September”.
Oliver then notes that households are already facing extreme pain from the RBA’s cumulative rate hikes.
“If you take that latest [0.25%] increase in the interest rate, that adds about $80 a month to mortgage interest payments on a $500,000 mortgage. If you take the total increase since April, it’s about $900 a month. That’s an extra $11,000 a year which a homeowner has to find”.
“Of course, that’s going to really eat into spending power and of course reduce growth in the economy over the course of the next 12 months”.
Oliver adds that the fixed rate mortgage reset will tighten monetary conditions even further without additional rate hikes from the RBA.
“About two-thirds of fixed rate mortgages reset over the next 12 months. And they’ll jump from around 2% to something like 5% or 6%, again resulting in a huge hit to their spending power and could cause some financial instability issues”.
Fourthly, Oliver notes that rate hikes are already biting hard.
“Housing indicators are very weak. Falling house prices suppress consumer spending via negative wealth effects, consumer confidence is at recessionary levels, bank data shows a slowing in discretionary spending, and if you look at the latest retail sales data, they’re actually falling in real terms”.
Oliver also points out that “the risk of a global recession are quite high”.
Turning to house prices, Oliver says “there’s still more downside in house prices, and our view remains that top to bottom, we’ll see a 15% to 20% decline”.
Oliver explains that the increase in variable mortgage rates is yet to be fully felt, since it usually takes two to three months for rate rises to be fully passed through.
Moreover, there is still a risk of another rate hike, alongside the fixed rate mortgage reset, which “may cause some mortgage stress and distressed selling”. Economic conditions are also likely to deteriorate, with rising unemployment.
Finally, borrowing capacity has shrunk with a borrower today being able to borrow 27% less than before the RBA’s first rate hike in April.
“So, the bottom line is that we still expect further declines in property values over the next nine to 10 months… with a total top to bottom fall of between 15% to 20%”.
