Inflation and rate increases to end next year?
Exorbitant fuel, grocery, construction costs and now wage pressures, are providing the Reserve Bank of Australia (RBA) with many problems and interest rates will as a result continue to go up. Two big Australian banks say the RBA will raise it’s interest rate significantly higher than previously estimated. It’s likely then that house prices will inevitably continue to come down, but for how long will this cycle last before it reverses again? Will the RBA go too hard in the next 12 months? Will rates come down next year?
How high will rates be by the end of the year?
The labour (jobs) market is compounding the inflationary pressures we have in this country. The data below is what has our big banks concerned and our leading experts seeing the cash rate go even higher than what they originally thought.
Data from the Australian Bureau of Statistics (ABS) here above shows the unemployment rate at 3.5 per cent as of June 2022 which historically, is very low. This puts a lot of pressure on wages and if you see the graph below, Westpac are predicting that we will see wage growth exceeding the RBA’s target range in the coming months. While cost of living pressures will have households welcoming these new wage rises, the overall domestic inflation problem for the RBA is only exacerbated by higher pay. This is why federal Treasurer Jim Chalmers said pay rises “need to be sustainable so that businesses can afford to pay them”.
This week, July 27, we will know the Consumer Price Index (CPI) figures which measure the household expenditure and overall inflation data as they are released by the ABS and this will most likely be as high as expected, with experts tipping the figure to be above 6 per cent.
Given the unemployment rate and overall inflation data expectations, Westpac chief economist Bill Evans believes the RBA will raise the cash rate by .50 of a per cent in August next month and again, by .50 of a per cent in September, with even more cuts taking the cash rate to 3.35 per cent in February 2023. Westpac’s previous forecast was for a maximum end cash rate in 2023 of 2.6 per cent, as shown in our blog earlier on in the month, and this updated forecast is much higher now.
What will my new repayment be when rates rise next month?
On variable, principal and interest (P&I) monthly repayments for your home loan (owner occupied), this increase of .5 of a per cent as forecasted, will equate to:
- an extra $139, on a loan of $500,000
- an extra $209, on a loan of $750,000
- an extra $278, on a loan of $1,000,000
Note: Adopted a rate increase of .50 per cent, taking 3.19 per cent to 3.69 per cent, making P&I repayments over a 30-year term, which is likely to result in August 2022.
Housing crash, is it really happening?
Our fixed mortgage rates are already higher and Wesptac and St George increased theirs again last week. And when variable mortgage rates go up again next month, borrowing will get even tougher, because the banks apply a 3 per cent buffer to our future repayments. The banks will make it harder for us to service our future debts because our servicing assessments will be based on these much higher buffers or benchmark rates. We explained how this benchmark assessment works, under the subheading By how much will these rate hikes impact my borrowing capacity in our June blog, last month.
These higher fixed and variable rates make for tougher borrowing conditions, and with this, buyer sentiment falls. Property growth rates are now easing, which is great news for buyers, not sellers. Data from Corelogic is showing most regions losing steam, but sharper declines across Melbourne and Sydney are being seen. In Sydney in particular, there was a fall in growth rates for the most recent rolling quarter, down by 2.8 per cent.
If we look at actual dwelling values, Corelogic is showing a sharper fall as rates rise – literally from the point on 5 May, 2022, you can see prices fall.
When does the economy turn for the good?
It’s likely that we will see more headwinds than tailwinds, but there are experts that do believe that the economic environment will normalise in 2023, with some suggesting that the RBA may have gone too hard with rate rises and be forced then to cut rates again. If we look at this notion logically, with higher rates we should see costs rise for businesses so unemployment naturally goes up. Prices in property will come down as they have already. Construction and general consumer goods will then come down in different portions too. If we’re sitting at borrowing home loan principal and interest variable rates of circa 5.24 per cent, conditions will be tough, especially given our debt levels here in this country. If the RBA does go as hard as what the banks and economists are predicting, then this may just be the requirement for rate cuts.
Our new RBA deputy governor Michelle Bullock suggests, that households “have large liquidity buffers”.
While we have “built-in larger buffers for interest rate increases”, we do have large household debts and because of this, our Australian economy is vulnerable to these rate movements so it’s likely that our impacts from these rate increases will be fast and hard. Unlike other countries that have these 10, 20 or 30-year fixed rate terms. Which means in these countries, like the UK or the US, rate changes only really impact new purchases or refinances, not their existing loans until quite some time has passed.
Final thoughts
We are likely to see a bit more refinancing, as this higher inflation environment makes life quite expensive and we try to make savings wherever we can - especially if we see some lenders not pass each rate cut on, in full.
We've worked very hard to create long-lasting, fostered relationships with all the 30 plus lenders on our panel, to ensure all our borrowers here at Black & White Finance are on the best terms available. Our finance strategies now more so than ever, need to be smart and in our best interests, to tackle this inflationary economic landscape.
If you want to know more about the different rates, terms, or bank specials on offer at the moment or just have a general question, please send a note to peter@blackandwhitefinance.com.au or click the start today button a little lower. With the help of our amazing Mortgage Broker Sydney – Black and White Finance team, we will be able to support you.
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Peter Vassilis
Mortgage Broker Sydney - Black & White Finance