Real Estate Investment:Today

Can we expect the RBA to go easy on interest rate hikes from now on?

By lifting its cash rate by 0.5 points, from 0.35% to 0.85%, the Reserve Bank has added about another $120 per month in payments for a A$500,000 mortgage.

If financial markets are to be believed, by the end of this year it will have added a total of $800 per month – and, by the end of next year, a total approaching $1,000 per month.

Those figures are for variable mortgages, but homeowners on fixed rates won’t escape them long.

Those rates are typically fixed for up to three years.

Many of the fixed-rate mortgages were taken out during COVID at annual rates as low as 2%.

When those fixed rates end (and many will end in the next year or so) those homeowners will find themselves paying 5% or 6% per year, shelling out as much as $3,000 per month instead of $2,000.

Unless financial markets are wrong.

The good news is, I think they are.

The pricing of deals on the futures market factors in an increase in the Reserve Bank’s cash rate from 0.10% to 3.5% by June next year, enough to push up the standard variable mortgage rate from around 2.25% to 5.65%.

We couldn’t afford the rates the market expects

One reason for suspecting it won’t happen is that many homeowners simply couldn’t afford the extra $1,000 per month.

Most of us don’t have that much cash lying around.

US President Richard Nixon had an economic adviser by the name of Herbert Stein with an uncommonly-developed sense of common sense.

In his later years, he wrote an advice column for Slate magazine.

To a reader wanting a cure for unrequited love, he wrote that the best solution was “requited, love”.

To a reader concerned about her inability to make small talk, he wrote that what people want most is a “good listener”.

In economics, Stein is best known for Stein’s Law, which says: “if something cannot go on forever, it will stop”.

Mortgage rates can’t keep climbing to the point where homeowners pay an extra $1,000 per month.

For new homeowners, it’s worse.

The typical new mortgage taken out to buy a home in NSW has climbed to $700,000.

In Victoria, it has climbed to $585,000.

These people will be paying a good deal more than an extra $1,000 per month if the bets on repeated rate hikes made on the futures market come to pass.

The Reserve Bank says it lifted its cash rate from 0.35% to 0.85% today to withdraw the “extraordinary monetary support” put in place during the pandemic.

But the bank says from here on it will be guided by data, and, in a nod to homeowners concerned about continual rate hikes, said it expected inflation to climb just a bit more before declining back towards its target next year.

The bank will be guided by data

Financial markets don’t see it that way.

They have priced in (in other words, bet money on) rate hikes in July, August, September, October, November, December, February, March, April and May.

But there are reasons to believe the bank is right about inflation.

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