The RBA has launched its rate hike cycle. Can Australia hack it?
So the RBA hiked rates as expected this week.
Actually, I shouldn’t say that. They hiked more than expected. Most economists were expecting them to hike rates by 0.15 basis points, to get us from the “as low as it can possibly go” 0.1%, to a more even and regular 0.25%.
In the end we got 25bps to take us to the kinda odd looking 0.35%.
The practical difference is trivial, but it sent a loud and powerful message.
And that message was that the RBA had it wrong. Inflation was not contained and the RBA was behind the curve.
They needed to get ahead of it and get ahead of it quickly. So we got a full 25bps, with every prospect that we’ll keep getting 25bps until the last hike of the cycle, where things might finally even out a bit.
As a result of the RBA’s surprise move, coming on top of the inflation data last week which surprised to the upside as well, markets and economists are scrambling to adjust their forecasts.
Suddenly rate hikes are go and we’re off to the races.
Right now, based on government bond yields, markets are expecting the cash rate to go from it’s current level of 0.35%, all the way up to 3% by the end of next year.
That is, we’re currently pricing in 11 rate hikes in a relatively short time.
Market pricing has a been a bit off since the RBA started messing with bond yields through their YCC – yield curve control policy, so not many economists expect it to actually play out this way.
But for the sake of argument, that upper-bound scenario would see mortgage rates returning to 5.5-6%.
Can Australia handle that? Can the housing market handle that?
How you think about that question probably depends on how long you’ve been in the game.
If you’ve been in the game as long as (cough) I have, then you’re probably not going to freak out about a mortgage rate of 5.5%.
That’s pretty mild in the context of the long view.
But, if you bought your house last year, or you’ve only been following the market for a few years, that might look a tad alarming.
I mean, most investors have never even seen a rate hike. The last time the RBA hiked rates was in November 2010. That’s a long time ago in the scheme of things.
But regardless of your perspective, let’s have a look at the data.
And the data says that household mortgage repayments, as a percent of disposable income, fell through the floor through Covid.
At a touch over 4%, they’re back where they were way back in the year 2000.
They were up over 10% of disposable income prior to the GFC, and the wheels didn’t fall off the housing market then.
So this says to me that households have a high capacity to eat quite a few interest rates before it starts causing any real pain.
Sure, borrowers who fully stretched themselves last year to get in might feel it, but those buyers will be a very small percentage of the overall market.
So for me, this gives me a lot of confidence.
Even the worst case scenario – which I don’t think will happen anyway – but even that worst case scenario looks like it should be pretty easily managed.
It will take more than a few rate hikes to slow this market down.