markets lower peak to 3% from 4.5%

Money markets are betting there’s a roughly 90% chance the cash rate will rise another 0.5 percentage points to 1.85% tomorrow, while economists at Nomura are banking on a rise against the odds of 0.75 percentage point due to strong underlying inflation and the low unemployment rate of 3.5%.

But money markets slashed prices for the RBA’s maximum cash rate significantly to 3% from a forecast of 4.5% in June.

“It’s time to assess”

Curve Securities director Peter Sheahan says money markets have lowered the maximum RBA cash rate price to 3%, after the US Federal Reserve signaled it may ‘pause’ rate hikes interest after a tightening of monetary policy in the coming months.

“The number of RBA and terminal rate hikes has been dramatically revised in just six weeks, from 10 hikes to six hikes and 3%, after aggressive action by the US Federal Reserve and the ‘pause’ commentary to give them time to assess,” Mr. Sheahan said.

The Commonwealth Bank of Australia expects a cut in the cash rate from a peak of 2.6% from the end of 2023, and Westpac and ANZ expect a terminal rate above 3% with cuts in by mid-2024.

CoreLogic research director Tim Lawless said the decline in house prices is likely to accelerate in the coming months in a “short and sharp cycle” in line with movements in interest rates, before stabilizing when there is more clarity on future interest rate levels and possible rate cuts at the end of 2023. .

Nationally, median home prices are down 2% from their peak at the start of the year, after jumping 28.6% during the pandemic, according to real estate data firm CoreLogic.

Property prices across the country are being watched closely as Sydney auction clearance rates continue to fall. Peter Rae

The more expensive and more indebted housing markets of Sydney (minus 2.2%) and Melbourne (minus 1.5%) again led the declines in July, with Brisbane (minus 0.8%) slipping into negative territory for the first time in two years, plus Canberra (minus 1.1%) and Hobart (minus 1.5%) also down.

Only three of the eight capitals recorded monthly price growth, including Perth (0.2%), Adelaide (0.4%) and Darwin (0.5%), but the pace of house price increases is slowing rapidly .

More than one in four home sellers in Sydney are withdrawing their properties from auction due to pessimistic sentiment.

Mr Lawless said housing market conditions were likely to worsen as interest rates rose through the rest of the year.

“The rate of growth in home values ​​was slowing long before interest rates started to rise. However, it is quite clear that markets have weakened quite sharply since the first rate hike on May 5,” he said.

“Although the housing market has only been down for three months, the National Home Value Index shows the rate of decline is comparable to the onset of the global financial crisis in 2008 and the sharp drop in the early 2000s. 1980s.

Further examination

“Due to record debt levels, indebted households are more sensitive to higher interest rates, as well as the additional negative impact of very high inflation on balance sheets and sentiment.”

Senior RBA officials said household balance sheets were resilient to weather falling house prices, but admitted that house prices generally have a “significant influence” on consumer spending qu they will examine closely.

Federal Treasurer Jim Chalmers was less enthused by the RBA’s talk about the strength of household balance sheets, saying in a TV interview that aired on Sunday that “some have a bit of resilience built into their household budget and that’s obviously a very good thing.

“Some people were able to advance, for example, on their mortgage payments, but many people did not.

Treasurer Jim Chalmers disagrees with the RBA’s belief that Australian households are resilient to falling house prices and rising interest rates. Alex Ellinghausen

“A lot of people don’t have these buffers in their family budget.

“And even if they’re not homeowners struggling with rising interest rates, the inflation problem itself is really punishing the most vulnerable people.”

RBA Deputy Governor Michele Bullock said in July that a 10% fall in national house prices would only put 0.4% of home borrowers in a negative equity position. If house prices fall by 20%, only 2.5% of borrowers would have negative equity, below the 2018 level of 3.25%.

Income household credit of around 150 percent is historically high in gross terms. But that doesn’t take into account about $260 billion in additional pandemic savings in deposit and mortgage offset accounts.

More than half of variable rate borrowers are more than two years ahead of mortgage prepayments.

Therefore, in “net” terms, household credit to income is back to around 2007 levels, Ms Bullock said.

Follow the Fed’s lead

Additionally, much real estate debt is held by high-income earners, including investors who tend to have larger cash reserves.

“Nearly three-quarters of the debt stock is held by households in the top 40% of the income distribution; indebted households in the bottom 20% of the income distribution hold less than 5% of the debt,” Ms Bullock said in July.

Deutsche Bank economist Phil O’Donoghue said he expected the RBA to continue raising the cash rate monthly to 3.1% by December before pausing .

He said aggressive interest rate hikes by the US Federal Reserve would limit the US economy and slow global inflation, with price benefits for Australia.

“So, as we have done many times, this is an opportunity for Australia to get in, if you will, behind the back of tougher Fed policy, and have fewer problems. in terms of our own inflation here in Australia,” Mr O’Donoghue said.

According to the RBA, about 35% of variable rate borrowers are already making larger repayments than necessary to fully cover a 3 percentage point rise in mortgage rates.

However, nearly 30% of variable rate borrowers would face repayment increases of at least 40%.

Commonwealth Bank estimates that around $500 billion in fixed rate mortgages would need to be reset across all banks over two years.

People who have taken advantage of ultra-low fixed rates, often below 2%, face steep increases in refinancing costs over the next couple of years.

When the fixed rate mortgage pool expires, about half of these borrowers face an increase in repayments of at least 40%.

Borrowers whose fixed-rate loans are due to expire by the end of 2023 would see a median increase of about $650 (or 45%) in monthly repayments.

Morgan Stanley Bank analyst Richard Wiles said the RBA embarked on the ‘fastest and most aggressive’ tightening cycle since 1994, after saying the nominal neutral rate was at least 2 .5% and would be higher if medium-term inflation expectations increased.

“We believe this creates more challenges for banks than a ‘gradual and measured’ tightening cycle.” said Mr. Wiles.

“Earlier and larger rate hikes and a steeper yield curve underpin better margin recovery in the near term, but they are also likely to ultimately lead to higher deposit betas, higher funding more expensive wholesale, a weaker housing and mortgage market, and a bigger recession. risk.”

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