Money markets are betting there is about a 90 per cent chance the cash rate will rise another 0.5 of a percentage point to 1.85 per cent tomorrow, while Nomura economists are tipping an against-the-odds 0.75 of a percentage point rise because of strong underlying inflation and the low 3.5 per cent rate.
But money markets have significant wound back pricing on the peak RBA cash rate to 3 per cent, down from as much as 4.5 per cent forecast in June.
‘Time to assess’
Curve Securities director Peter Sheahan said money markets had lowered the peak RBA cash rate pricing to 3 per cent, after the US Federal Reserve signalled it could “pause” interest rate rises following more monetary policy tightening in the coming months.
“The number of RBA hikes and terminal rate has been revised significantly in just six weeks from 10 hikes, to six hikes and 3 per cent, after the US Federal Reserve’s aggressive action and ‘pause’ comment to give them time to assess,” Mr. Sheahan said.
The Commonwealth Bank of Australia is tipping a cut in the cash rate from a peak of 2.6 per cent starting in late 2023, and Westpac and ANZ expect a terminal rate above 3 per cent with cuts by mid-2024.
CoreLogic research director Tim Lawless said house price declines were likely to accelerate in coming months in a “short, sharp cycle” in line with interest rate movements, before stabilizing when there was more clarity on future interest rate levels and possible rate cuts in late 2023 .
Nationally, median house prices are down 2 per cent from their top earlier this year, after surging 28.6 per cent during the pandemic, according to property data firm CoreLogic.
The higher priced and more indebted housing markets of Sydney (minus 2.2 per cent) and Melbourne (minus 1.5 per cent) again led the July declines, with Brisbane (minus 0.8 per cent) edging into negative territory for the first time in two years, plus Canberra (minus 1.1 per cent) and Hobart (minus 1.5 per cent) also falling.
Only three of the eight capital cities recorded monthly price growth, including Perth (0.2 per cent), Adelaide (0.4 per cent) and Darwin (0.5 per cent), but the pace of house price rises is quickly slowing down.
More than one in four Sydney home vendors are withdrawing their properties from auction because of pessimistic sentiment.
Mr Lawless said housing market conditions were likely to worsen as interest rates rise through the remainder of the year.
“The rate of growth in housing values was slowed well before interest rates started to rise. However, it’s abundantly clear markets have weakened quite sharply since the first rate rise on May 5,” he said.
“Although the housing market is only three months into a decline, the national home value index shows that the rate of decline is comparable with the onset of the global crisis in 2008, and the sharp downswing of the early 1980s.
“Due to record high levels of debt, indebted households are more sensitive to higher interest rates, as well as the additional downside impact from very high inflation on balance sheets and sentiment.”
Senior RBA officials have said household balance sheets were resilient to withstand house price falls, but have admitted house prices typically have a “significant influence” on consumer spending that they will be closely examining.
Federal Treasurer Jim Chalmers was less enthused about the RBA’s talk of household balance sheet strength, saying in a television interview broadcast on Sunday that “some have a bit of resilience built into their household budgets and that’s obviously a very good thing.
“Some people have been able to get ahead, for example, on their mortgage repayments, but a lot of people haven’t.
“A lot of people don’t have those buffers in their household budgets.
“And even if they’re not homeowners dealing with rising interest rates, the inflation problem itself really punishes people who are the most vulnerable.”
RBA deputy governor Michele Bullock said in July that a 10 per cent national house price fall would put only 0.4 per cent of home borrowers in negative equity. If house prices fall 20 per cent, only 2.5 per cent of borrowers would be in negative equity, below the 2018 level of 3.25 per cent.
Household credit to income of about 150 per cent is extremely high in gross terms. But this glances about $260 billion of extra pandemic savings in deposit and mortgage offset accounts.
More than half of variable rate borrowers are more than two years ahead on mortgage prepayments.
Hence, in “net” terms, household credit to income is back to around 2007 levels, Ms Bullock said.
Following the Fed’s lead
Moreover, a large amount of housing debt is held by higher income earners including investors who tend to have bigger liquidity buffers.
“Almost three-quarters of outstanding debt is held by households in the top 40 per cent of the income distribution; indebted households in the bottom 20 per cent of the income distribution hold less than 5 per cent of the debt,” Ms Bullock said in July.
Deutsche Bank Economist Phil O’Donoghue said he expected the RBA to continue to increase the cash rate each month to 3.1 per cent by December before pausing.
He said aggressive interest rate rises by the US Federal Reserve would constrain the US economy and slow down global inflation, with price benefits for Australia.
“So as we have done plenty of times, it’s an opportunity for Australia to come in, on the back if you like, of tighter Fed policy, and have a less of a challenge in terms of our own inflation here in Australia,” Mr. O’Donoghue said.
About 35 per cent of variable rate borrowers are already making larger than necessary percentages to fully cover a 3 point rise in mortgage rates, according to the RBA.
However, almost 30 per cent of variable rate borrowers would face returns increases of at least 40 per cent.
Commonwealth Bank estimates about $500 billion of fixed rate mortgages are due to reset across the banks over two years.
People who took advantage of ultra-low fixed rates, often at less than 2 per cent, face sharp increases in refinancing costs during the next two years.
When the pool of fixed rate mortgages expires, about half of these borrowers face an increase in repayments of at least 40 per cent.
Borrowers with fixed-rate loans that are due to expire by the end of 2023 would experience a median increase of about $650 (or 45 per cent) in monthly payments.
Morgan Stanley bank analyst Richard Wiles said the RBA had embarked on the most “quick and aggressive” cycle since 1994, after it stated that the neutral nominal rate was at least 2.5 per cent and that it would be higher if medium-term inflation expectations increased.
“We believe this creates more challenges for banks than a ‘gradual and measured’ tightening cycle.” Mr Wiles said.
“Earlier and larger rate rises and a steeper yield curve underpin a better margin recovery in the near-term, but they are also likely to eventually lead to higher deposit betas, more expensive wholesale funding, a weaker housing and mortgage market, and greater recession risk.”