Homeowners are bracing for monthly mortgage payment increases of up to $1000 by the end of 2022 after the Reserve Bank of Australia’s first cash rate hike in more than a decade.
Following the shock spike in inflation the central bank has announced it will increase cash rates 25 basis points to 0.35 per cent and put a handbrake on the runaway cost of living, while foreshadowing further increases.
It is the first rate rise since November 2010 when cash rates were at 4.75 per cent and economists are warning we could see 2 per cent cash rates as early as the end of this year, which could increase a new borrower in Sydney’s variable rate mortgage by $1000 per month.
Economists warned of a looming rate hike after it was revealed Australia had chalked up a 5 per cent increase in the consumer price index over the past 12 months, led by construction of new houses and petrol prices.
The last change to the cash rate was in November 2020 when they dropped 15 basis points to 0.1 per cent. They have remained at this low level throughout the pandemic.
According to the minutes of the Reserve Bank’s April board, it is “the right time” to pare back monetary support measures put in place to scaffold the Australian economy during the pandemic.
“The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected,” the board said.
“There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.”
The cash rate hike announcement comes as the United States prepares for its biggest rates rise in 28 years.
Monthly mortgage repayments for new borrowers with rates hike
|City||Median dwelling value||Current repayment (80% LVR)||With 100bp increase||With 200bp increase|
Corelogic research director Tim Lawless said higher interest rates would put downwards pressure on housing price growth rates, but warned mortgage pain was on the way for new borrowers.
“[They] were already losing steam or, as in the case of Sydney and Melbourne, trending into negative territory due to factors including affordability constraints, higher fixed term mortgage rates and lower levels of consumer sentiment,” Lawless said.
“The low interest rate setting coincided with surging housing values; between November 2020 and April 2022 national housing values have increased by 27.0 per cent, adding approximately $159,300 to the median value of an Australian dwelling.
“Under a 100 basis point lift in variable mortgage rates, a new borrower in Sydney could be facing a rise in monthly mortgage costs of $486, while under a 200 basis point rise, monthly mortgage costs could be $1,005 higher than current levels.”
Capital Economics senior economist Marcel Thieliant said he expected cash rates to reach around 2 per cent by the end of this year.
“We expect the Bank to hike rates by 25 basis points at every meeting in the second half of the year, with the cash rate ending the year at around 2 per cent, and to reach 2.5 per cent by mid-2023,” Thieliant said.
“However the Bank dropped some hints that it may hike by 50 basis points.”
At a press conference on Tuesday, Reserve Bank governor Philip Lowe said that it was “not unreasonable” to expect that interest rates could rise to 2.5 per cent.
“How quickly we get there and if we do get there will be determined by how events unfold. We have an open mind. Over the past two years we have been very flexible, it changed in response to changing circumstances and we will continue to do that.”
HIA chief economist Tim Reardon warned the cash rate hike would do little to ease building materials cost inflation, but said it would not materially impact household budgets yet.
In good news, the Central Bank is forecasting unemployment will drop to an historic low of 3.5 per cent in early 2023, while GDP would grow 4.25 per cent over the remainder of 2022.
“Household and business balance sheets are generally in good shape, an upswing in business investment is underway and there is a large pipeline of construction work to be completed.
“Macroeconomic policy settings remain supportive of growth and national income is being boosted by higher commodity prices.”
While inflation was outside of the Central Bank’s target, it was forecasting the headline inflation rate to moderate to 3 per cent in mid-2024.
“The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.
“This will require a further lift in interest rates over the period ahead. The Board will continue to closely monitor the incoming information and evolving balance of risks as it determines the timing and extent of future interest rate increases.”
Lending rates fell 3.7 per cent across housing at the end of February, but were still up 12.6 per cent on this time last year according to Australian Bureau of Statistics data.
This is predominantly led by investor activity, with loan commitments up 55.8 per cent on this time last year.
Lending commitments for housing are now at $32.28 billion in Australia.