There is an ominous prediction of how big Australian mortgages will rise if they follow the same path as the US.
More than a decade has passed since the last interest rate hike, and during this time the risk of rising rates has slowly evolved and transformed in the minds of Australian mortgage holders.
Something that was once a pervasive concern has taken on an almost mythical quality in recent years. Tax hikes were something that happened once upon a time, but weren’t really a concern anymore.
When RBA Governor Philip Lowe confirmed for what seemed like the 100th time late last year that interest rates would not rise until 2024 at the earliest, it seemed likely that incumbents mortgages had nothing to fear.
After watching the RBA cut rates 18 times without a single rate hike over 11 years, it may have seemed that the direction of rates was clear.
Is America the canary in the coal mine?
In recent weeks, however, the US Federal Reserve (the Fed) has raised interest rates for the first time this cycle, raising the federal funds rate (the US equivalent of the RBA cash rate) at 0.25%.
But although the Fed only recently started its rate hike cycle, US mortgage rates have been rising since mid-January last year. Since the 30-year fixed mortgage rate hit a low of 2.65%, it has since risen to 4.67% or about 76% in relative terms.
It’s worth pointing out that this data only covers up to the week ending March 31 and some evidence suggests that since then US rates have continued their meteoric rise towards 5%.
Much of the increase in US mortgage rates has occurred since the start of the year, with rates rising 1.56% in the first three months of the year alone.
In relative terms, the current cycle of rising mortgage rates in the United States is the largest since 1980.
The current cycle of rising rates in relative terms is more than 2.5 times larger than that which preceded the collapse of the US housing market and the onset of the global financial crisis in 2008.
The trajectory of Australian interest rates
Despite previous claims by the RBA that rates would not rise until 2024, in recent months they have been forced to change their tone significantly. Although their official statements lack concrete indications of when rates will rise and by how much, in the world of monetary policy tea leaf readers, a June rate hike is now seen as likely.
As US mortgage rates continue to soar, many Australians are now wondering if the same could happen here.
According to market prices for Australian interest rate futures, it is certainly a possibility.
Currently, the market is pricing in a rate hike in June, a total of eight rate hikes by the end of the year and 12 by the middle of next year.
While the direction of rates currently priced in by interest rate futures markets is concerning to some mortgage holders, it is far from set in stone and remains only one possible future, one that the market currently considers the most likely.
In the past, the market has been significantly wrong and wrong in predicting Australia’s rapid rate hike cycles, but given the challenging backdrop of rising global inflation and soaring mortgage rates Americans, this time may be different.
But let’s say for the sake of argument that the market is right; how would the predicted hiking cycle compare to those we have seen in generations past?
If the market price of a 3.4% cash rate by August next year is correct, it would represent the biggest bull run in relative terms since comparable records began.
As for the rate payable on the average homeowner’s mortgage, it would increase by 124.8%, more than double the previous record reached between 2002 and 2008.
Even when compared to the 17 percent rise in rates between May 1988 and June 1989, the currently projected rise in relative terms is about five times greater.
A demanding perspective
While interest rate futures predict by far the toughest rise in Australian interest rates in the country’s history, this is just one view and far from a concrete certainty.
As for the expectations of some of Australia’s most respected commentators on interest rates, they generally see higher rates, but not as high as current market prices.
On Thursday, Westpac’s Bill Evans revised the banks’ projections to include five rate hikes in 2022, a cash rate of 1.25% by the end of the year and a spike of 2%.
Meanwhile, Commonwealth Bank and UBS don’t think the spot rate will go that far, suggesting the terminal level would be closer to around 1.25% to 1.5%.
Ultimately, we live in highly uncertain and complex times. Between the war in Ukraine, the ongoing shutdowns in China, and growing social unrest around the world, this time may indeed be different.
Although there are warnings that the cash rate above 3% could collapse the housing market and cause a recession, it remains difficult to predict exactly what will be needed to control inflation in these circumstances without previous.
Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator