Yesterday’s cash rate hike was a major blow to many Australians, with fears that further hikes could lead Australia into a new recession.
On Tuesday, the Reserve Bank of Australia (RBA) sent a dagger into the hearts of Australian mortgage holders, raising the official cash rate (OCR) another 0.5%, the third consecutive monthly increase.
The decision sent the OCR to 1.35 per cent, a sharp increase of 0.1 per cent, April’s all-time low.
In a matter of days, Australia’s variable mortgage holders will feel the impact.
As illustrated in the chart below, the average discount variable rate mortgage will increase to 4.7%, from 3.45% in April. Fixed-rate mortgage rates have already risen sharply, with the 3-year average fixed rate rising to 5.7% in June, well above the pandemic low of 2.1%.
Average monthly mortgage repayments have skyrocketed 16% from the pre-April hardening level.
For a home with a $ 500,000 mortgage, this represents a monthly increase in repayments of $ 362, while a home with a $ 1,000,000 mortgage will pay an additional $ 724 a month.
The nightmare of the mortgage has just begun
The Australian Financial Review’s The latest survey of 31 economists revealed an average OCR forecast of 2.35% for December and a high of 2.85% by the middle of next year.
If true, Australia’s OCR would rise another 1.5% from its current level below the average projection of economists.
The futures market remains even more bullish, tilting an OCR of 3.0% in December and 3.5% in June 2023.
If interest rate forecasts come to fruition, Australian mortgage rates would rise.
Australia’s average discount variable rate mortgage would rise to 6.2% below economists ’forecast (discontinuous red line below) and 6.9% below market forecast (solid red line below).
This would cause average monthly mortgage repayments to increase by 37 percent (economists forecast) or 48 percent (futures market forecast) compared to the April level before the RBA began its hardening cycle. of type.
In dollar terms, a home with a $ 500,000 mortgage would see its monthly repayments increase by $ 831 (economists forecast) or $ 1,062 (futures market forecast), while a home with a $ 1 million mortgage dollars would see monthly amortizations increase by $ 1,662 or $ 2,123.
Housing prices in Australia could fall
The RBA runs the risk of sending house prices down if it raises rates as aggressively as economists, let alone, are forecasting the market.
With Australian house prices soaring around 35 per cent during the pandemic due to deep cuts in mortgage rates, sharp price falls would necessarily stem from the sharper rise in depreciation of mortgages in the history of the country. Interest rates are a double-edged sword.
In its latest financial stability review, the RBA estimated “that a 200 basis point increase in interest rates from current levels would reduce real home prices by about 15 percent during a period of two years “.
Thus, economists ’forecast of an OCR of 2.85 per cent suggests a maximum-to-minimum fall in real Australian housing prices by around 20 per cent.
The 3.5% OCR futures market forecast would reduce real home prices by around 25% in real terms according to the RBA model.
The RBA runs the risk of driving Australia into recession
Never before had the RBA begun a cycle of tightening tariffs with consumer confidence in such a poor state. The latest ANZ-Roy Morgan Consumer Confidence Index has tracked confidence to its lowest level since the pandemic began in April 2020.
In fact, outside of the pandemic, consumer confidence has been at its lowest level since the recession of the early 1990s.
Household consumption is the engine room of the Australian economy, accounting for 55 per cent of final demand in a normal quarter. Therefore, where household consumption goes, the economy usually continues, as illustrated in the graph below.
If mortgage repayments increase as sharply as expected, this will mean that there will be fewer funds available for spending across the economy, which will drain economic growth.
The negative drag on household consumption would also be exacerbated by a sharp fall in house prices, which would make Australians feel poorer.
If the RBA meets the forecasts of economists or the futures market and rates tighten too much, it is likely to push the Australian economy into an unnecessary recession. Therefore, the RBA must be careful with rates.
We could see interest rate cuts in 2023
At the start of the global financial crisis in 2008, the RBA mistakenly increased OCR by 1.0 percent. After the economy faltered and house prices began to fall, the RBA was forced into a strong investment in which it cut rates by 4.0 percent in just six months.
We can see again that something similar happens after the RBA hardens too much. Don’t be surprised to see the RBA cut rates during the second half of 2023 to counteract the sharp falls in house prices and a recession.
Leith van Onselen is chief economist at MB Fund and MB Super. Leith has previously worked for the Australian Treasury, Victorian Treasury and Goldman Sachs.
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