July 7, 2022 by Dymphna

Rates go up. What happens next?

RBA hikes, but it’s not as bad as people think.   

So the RBA hiked rates by another 50 basis points on Tuesday.

That’s the third hike in a row now, with many people saying we’ll get another one next month.

It’s possible.

But even if that’s true, and even if it’s a big rate increase – like another 50bps, it would still leave the official cash rate under 2% – making it still one of the lowest cash rates in history.

But the message from the RBA is clear. They’re worried about inflation, and they’re willing to pull out the big guns to shoot it down.

The Conversation did a survey of Aussie economists, and asked them where they thought inflation would peak.

Most seem to see it getting somewhere around 7% by the end of next year.

That said, there’s a bit of variation there, which goes to show that predicting economic outcomes is very difficult.

But when you remember that headline inflation is currently running at 5.1%, a lift to 7% over the next 18 months isn’t all that crazy.

Maybe the RBA is jumping at shadows?

The Conversation also asked those Economists how high they thought interest rates would get.

Again, there’s some big differences in their guesses – sorry, forecasts. But most see interest rates running a little further, from 1.35% currently, to around 3% by mid next year.

Maybe. I’d not that half the economists think it’ll be less than that, but maybe that’s about right.

What’s the impact of that.

Well, you can see in this chart here what happens to the standard variable mortgage rate in that kind of scenario. It’s pushing towards 6%.

Now, if you lived through the 90s, that’s not going to scare you too much. But I’ll admit that for some new buyers would bought at fixed rate mortgages below 2% during Covid, an effective tripling of interest rates could be a scary prospect.

That said, what we’re talking about here is the banks advertised basic rate. The actual rate you get can be substantially less. I mean, you can still get a mortgage under 3%, so I’d say the peak, in practice, is about 5%.

So if you’re crunching your numbers, it’s definitely worth thinking about those outside scenarios, but my guess is that actual mortgage rates in the market will peak somewhere between 5 and 6%.

Now, that may or may not impact on house prices. As I’ve written about, a lot of it has to do with inflation, and the cost of new housing and so on.

But it does seem that a consolidation is inevitable now. Australian house prices had a phenomenal run, and they probably do need to take a breather.

When The Conversation asked the economists what they thought, apart from your usual outliers, most seemed to think prices in Sydney and Melbourne would fall about 6-7%.

That’s not much. In most places you’d barely notice it.

Anyway, yes, rates are rising. Yes, property prices are going to take a little breather.

But lets not make a mountain out of a molehill.

These are pretty modest movements in historical context.