Death Star Interest Rate Erases Mortgage Holders

A week ago, the futures market moderated its forecast for the Australian official exchange rate (OCR), tipping a rate of 3.0% in December and a peak of 3.5% in May 2023:

July 7: The futures market forecasts an OCR peak of 3.5% in May 2023.

This forecast would have seen Australia’s average discount variable mortgage rate rise to 6.8% by May 2023, assuming OCR increases are passed on to mortgage holders. This would be almost double the level before the April tightening of 3.45%.

Following strong labor market data on Thursday, which saw Australia’s unemployment rate slump to 3.5%, its lowest level in 48 years, the futures market raised its OCR forecast. It now tips an OCR of 3.3% by December before peaking at around 3.75% in May 2023:

Forward Market Interest Rate Forecast: July 14, 2022

July 14, 2022: The futures market forecasts an OCR peak of 3.75% in May 2023.

If true, this would see Australia’s average variable discount mortgage rate soar to 7.1%, more than double its pre-tightening level:

Mortgage Rate Forecast: July 14, 2022

Variable mortgage rates will more than double to 7.1%.

In fact, Australia’s average variable discount mortgage rate would climb to its highest level since March 2011 according to the latest futures market forecast.

The impact on Australian mortgage holders would be devastating. Average mortgage payments would climb 51% from where they were immediately before the Reserve Bank’s initial rate hike in May:

Australian mortgage repayments

Want a 51% increase in mortgage repayments?

For a household with a $500,000 adjustable rate mortgage, this would represent a monthly increase in repayments of $1,129, while a household with a $1,000,000 mortgage would pay $2,258 more per month.

Rate hikes of this magnitude would also depress property prices in Australia and could push the economy into recession, given the hit to consumer spending – the main engine of growth in the economy.

Given that house prices have skyrocketed 35% during the pandemic following sharp declines in mortgage rates, significant price declines would necessarily follow the largest increase in mortgage repayments in US history. Australia.

The market must recognize that interest rates are a double-edged sword.

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