When will mortgage rates rise and by how much?

Interested to hear the thoughts of the forum on this one. To me this is potentially the biggest risk to the property market in the medium term.

The RBA has said they plan to defend low rates for the next few years, but the bond market selloff last week showed the potential for rates to rise regardless of what the central banks want.

Commodity prices are pumping, the world is opening up again, a lot of cash floating around and unlike the GFC more of it has made it to the real economy not just banks. There are a lot of drivers for inflation out there.

What is the likely scenario for mortgage rates in Australia? I know the RBA is supporting low rates with the term funding facility, but is it still the case that a lot of our bank funding is from offshore RMBS? If the yields rise here how will the RBA keep rates low? If inflation start tearing away how can RBA manage an overheating economy without raising rates?

Once they do start going up, how high could they go? If people are calibrating their mortgage borrowing at 2%, you would have to think there will be a lot of mortgage stress if rates got back up to 6 or 7%.

 

My complete layman's guess is that they won't rise by much and won't do so very soon. Even a 50 basis point increase would cause a dramatic slowdown in growth.

I personally like to factor in a 2% rise. Could you stomach that? If so, I'm pretty sure you're safe, as many, many people couldn't and the RBA won't send everyone bust.

 

There's clearly an argument to raise rates a little to cool down the market. There's also a somewhat shaddy argument as to why the government might not want to slow the market down just yet...

I read yesterday that property sales right now are something like 180% of what they were at the beginning of last year (pre-pandemic). That's a lot of stamp duty revenue the state governments are receiving. It's a lot of CGT for the ATO. Increasing prices may push up council rate revenue.

It may be that the governments don't need to raise taxes to pay the pandemic deficit. They might recover their expediture via property taxes.

Just a theory for the conspritists out there...

 

When the interest rate gets to 16.9% pa I will be losing money and will need to either sell down or get a job

 

The race to access equity loans and buy additional investment property and shares has the RBA rattled. I suspect they wont touch rates. But watch APRA. They could impose controls on lenders to curb enthusiasm. APRA may do some arm twisting on prudential standards and approval process etc

 

I think they will double to 5% to 6%.

 

The RBA has one eye on the strength of the AUD impacting exports, it’s not solely focused on the housing market (or maybe not at all). In the absence of inflation (as measured), there’s no impetus to raise rates. Instead, I think the RBA will look to APRA to tighten lending standards.

There is also flow-on effects from what happens overseas. If Biden’s spending generates sufficient inflation that the Fed raises rates, that changes the USD/AUD relativity if the RBA does not.

 

It will be a two step process:

1. Middle to end of 2022
- Fixed rates start rising as the RBA facility for the banks to borrow for 3 years at 0.1% stops

2. 2023/ 2024 onwards
- actual cash rates rises slowly up to 1.5% over 2-3 years. Borrowing rates goes up to 3.5-4%

longer term risk of even higher rates if inflation gets out of the bag, but I still think that is unlikely.

I could be completely wrong, but this this my working assumption at the moment.

 

IMO the interest rates may not stay 'very low for 3 years' like the RBA has been claiming.

This was posted a few days ago which I found interesting: Money market madness: How the RBA and every central bank have been left humiliated

More rumblings continue today on the financial markets:

"Asian shares fell Thursday, tracking a decline on Wall Street as another rise in bond yields rattled investors who worry that higher inflation may prompt central banks to raise ultra-low interest rates."

Asian shares track Wall St decline as bond yields rebound - CityNews Toronto

 

To be honest I only have a superficial understanding about bank funding and the bond markets, but I can clearly remember the banks raising interest rates independent of the RBA cash rate back around 2012 or 2013. At that time interest rates were getting up towards 7%, and from memory this was due to the cost of raising additional funds on offshore debt markets. In an environment of global inflation is there not a risk that this could happen again?

 

No expert in the matter but we are STILL in a pandemic. Australian confidence is however at an all time high which is flowing through all over the economy, not just housing.

To do anything like raise rates on the back of a few months of confidence buying would be ludicrous. The last thing you want is households to tighten up again and employers to put the breaks on hiring.

We should know by now that everyone in Australia ties there wealth to there home. For Every 1% increase is a million people taking a holiday and ATM they are only putting it back into the economy.

 

30 Year Mortgages from FreddieMac in USA just went over 3%. The graph goes back to the start of the pandemic for context.

I would expect rates in Oz to rise faster than people expect, especially now the vaccine is being rolled out.

 

Ultimately bank interest rates are driven by shorter term funding rates, which the RBA sets. You cannot escape that.

Interest rates will only rise materially unless you expect the RBA to lift. They are saying they won't lift until 2024. Worst case they start lifting in 2023.

US is different story where people borrow on 30 year terms. So in that context the yield on long duration bonds actually matters.

 

If you strip out all the noise and look solely at the data;

Unemployment starts with a 6, inflation is still below 1 for the year and economic growth for the year is negative.

Those are the key metrics.

About 10 months ago when the sheer scale of covid19 economic impacts were dawning on us, this unemployment number would've been seen as a blessing. But 18 months ago it'd be a curse.

House prices going up, US funding rates, stamp duty revenues, 'we expected a lot worse', etc...these are merely contextual considerations for the main benchmarks that matter.

Interest rates aren't rising ANYTIME soon. The RBA has made it very clear that it intends on doing whatever it takes too. They have also noted that inflation can average out to their window and they'll accept a period above if required too.

Australia has done amazingly through Covid (both economically and health wise). But the stimulatory policy settings are here to stay for a while yet. In the absence of a 'unknown' inflation spike event, unemployment needs to keep falling significantly and get close to a number starting with a 4 before serious talks of rate rises kick in.

 

I would also add RBA is watching the unemployment rate too, and I think they would like it decreased from 6.6% at the moment.
Also, very fine balance for RBA to be wrong, do we wish to bet against them and their predicted 3 year no change to interest rates? I think once property prices increase it will be a natural stability were high prices will force many people buying higher as their lending wont permit that, unless other changes will be introduced there (like higher deposits like in NZ, but I doubt that!).
Interesting times indeed! Each year there's some X factor at play?

 

You are very rarely of the mark. Thanks for your take!

 

Good read from today's fin review - Long & short is that int rates are not rising unless the unemployment goes down to be around 4% - huge decline from the current c6.4%. Which is why RBA says it wont raise rates until after 2024. Talks of the macro prudential policy in action rather than int rates if prop markets get super heated.

Why the RBA plans to keep rates low for years


"To understand if the official overnight interest rate will remain near zero until 2024 as the Reserve Bank of Australia suggests, RBA watchers need understand the bank’s thinking on the economic concept known as NAIRU."

"Crucially, the RBA insists it will no longer increase interest rates if it merely thinks inflation is on track to move into the target range in the future.

(As an aside, if the RBA gets worried about surging house prices and risky credit growth, before considering raising interest rates the central bank will push the prudential regulator to put speed limits on home loans.)

All else equal, nominal wages will need to grow at an annual pace of 3-4 per cent for inflation to be 2-3 per cent (assuming annual productivity growth of about 1 per cent)."

 

When they do rise in a few years time how high are they likely to go?

 

I have only seen Bank interest rates rise to 24% pa which I hope they don't reoccur as I will cashflow negative after 14%.
Where is your break even @Property Baron ?
Twenty percent ?

 

Haha like many even if they jumped up to 5% would put pressure