How rising US mortgage rates may affect Australians


There’s an ominous prediction about how far Australian mortgages could go if they followed the same path as the US.

It has been more than a decade since interest rates were last raised and in that time the risk of rising rates has slowly evolved and changed in the minds of Australian mortgage holders.

What was once a ubiquitous concern has taken on an almost mythical quality in recent years. Tax increases were something that used to exist but weren’t really an issue anymore.

When RBA Governor Philip Lowe confirmed for what felt like the hundredth time late last year that interest rates would not rise until 2024 at the earliest, it seemed likely that mortgage holders had nothing to fear.

After the RBA cut rates 18 times without a single rate hike over 11 years, it seemed the direction of interest rates was clear.

Is America the canary in the coal mine?

In recent weeks, however, the US Federal Reserve (The Fed) has hiked interest rates for the first time this cycle, raising the federal funds rate (the US equivalent of the RBA cash rate) to 0.25 percent.

But although the Fed only recently started its rate-hiking cycle, US mortgage rates have been rising since mid-January last year. Since the 30-year fixed-rate mortgage rate bottomed at 2.65 percent, it has since risen to 4.67 percent, or around 76 percent in relative terms.

It should be noted that this data only covers up to the week ended March 31 and some indications are that US interest rates have since continued their meteoric rise towards 5 percent.

Much of the rise in US mortgage rates has occurred since the beginning of the year, with rates rising 1.56 percent in the first three months of the year alone.

In relative terms, the current cycle of rises in US mortgage rates is the largest since 1980.

The current rate hike cycle is more than 2.5 times larger in relative terms than the one that took place leading up to the US housing market collapse and the start of the 2008 global financial crisis.

The path for Australian interest rates

Despite the RBA’s previous claims that rates would not rise until 2024, it has been forced to change its mind significantly in recent months. While their formal statements offer no concrete indication of when and by how much rates will rise, in the world of monetary policy tea-leaf readers, a June rate hike is now considered likely.

As US mortgage rates continue to soar, many in Australia are now wondering if the same could happen here?

Judging by the market prices of Australian interest rate futures, this is certainly a possibility.

Currently the market is pricing in rate hikes 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 interest rates currently being priced in by interest rate futures markets is a concern for some mortgage holders, it is far from set in stone and remains just one possible future that the market currently sees as the most likely.

In the past, the market has been wrong and far off the mark in predicting rapid Australian rate-hike cycles, but given the challenging backdrop of rising global inflation and skyrocketing US mortgage rates, it’s possible this time could be different.

But let’s assume for the sake of argument that the market is right; How would the predicted migration cycle compare to those we’ve seen in previous generations?

If market pricing of the 3.4 percent cash rate through August next year is correct, this would represent the relatively largest rate hike cycle on record.

The interest rate on the average home mortgage would rise 124.8 percent, or more than double the previous record high between 2002 and 2008.

Even in contrast to the rise in interest rates to 17 percent between May 1988 and June 1989, the relative rise currently projected is about five times that.

A challenging outlook

While interest rate futures are projecting by far the most challenging hike in Australia’s interest rates in the country’s history, this is only one view and far from concrete certainty.

Regarding the expectations of some of Australia’s most respected rate commentators, they generally see higher rates, but not as high as current market prices.

On Thursday, Westpac’s Bill Evans revised banks’ forecasts to include five rate hikes in 2022, a policy rate of 1.25 percent through year-end and a peak of 2 percent.

Meanwhile, the Commonwealth Bank and UBS don’t think interest rates will get that far, suggesting the terminal level would be closer to around 1.25-1.5 percent.

Ultimately, we live in highly uncertain and complex times. Between the war in Ukraine, ongoing lockdowns in China, and growing social unrest around the world, this time could actually be different.

While there are warnings that interest rates above 3 percent could crash the housing market and trigger a recession, it remains unclear exactly what it will take to bring inflation under control in these unprecedented circumstances.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator

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