Yesterday’s move was the eighth consecutive increase, 25 basis points from 2.85% to 3.10%, means rates are now at the highest level in 10 years.
RBA governor Philip Lowe who recently apologised to the thousands of Australians who took out mortgages on the RBA’s guidance that interest rates would stay at their record low until 2024, yesterday reiterated that inflation remained “too high”, although it noted it has decreased from 7.3% to 6.9% in October.
Nevertheless, the RBA still expects inflation to reach 8% this year.
Marcel Thieliant, senior Japan, Australia & New Zealand economist with Capital Economics, said the more significant change was that the Bank caveated its view that it expects interest rates to increase further over the period ahead by noting that “it is not on a pre-set path”.
“However, that caveat has been used by Governor Lowe since early-November and given that the Board reiterated its determination to return inflation to target, it’s difficult to argue that the Bank is backing away from rate hikes just yet.
“We still think that the Bank will want to see solid evidence that inflation is slowing rather than just plateauing at very high levels and it will take a few more months for that evidence to accumulate. The upshot is that we expect the Bank to hike rates to an above-consensus 3.85% by April, though we expect a sharp slowdown in GDP growth and inflation to trigger renewed rate cuts from end-2023.” Thieliant said.
The eight increases combined will add almost $11,000 in cost to service a $500,000 mortgage, according to Finder.
“Put another way, Aussies with a $500,000 mortgage will be paying almost $900 more per month compared to what they were paying in April,” Graham Cooke, head of consumer research at Finder.
“To comfortably afford this you’d need to be earning a minimum income of just over $180K – significantly more than the average salary,” added.
| Cash rate | Average home loan rate* | Average monthly repayment | Average monthly increase | Average annual repayment | Average annual increase | Minimum pre-tax income required | |
| April 2022 | 0.10% | 3.45% | $2,231 | – | $26,772 | – | $121,707 |
| November (current rate) | 2.85% | 6.15%** | $3,046 | $815 | $36,552 | $9,780 | $175,265 |
| December (25bp rate rise applied) | 3.10% | 6.40%** | $3,128 | $897 | $37,536 | $10,764 | $180,602 |
| 4.00% (predicted peak) | 4% | 7.3%** | $3,428 | $1,197 | $41,136 | $14,364 | $203,358 |
| Source: Finder, RBA. *Owner-occupier variable discounted rate. Repayments based on a $500,000 loan **Expected rise to current average rate | |||||||
CoreLogic Australia’s head of research Eliza Owen said with forecasts ranging from 3.1% to 3.85%, the higher rate environment will test housing market conditions in 2023, when the majority of outstanding fixed-term mortgages are expected to expire.
“The impact of recent rate rises on housing is flowing through to lower volumes of new mortgage finance secured. From May through to October of this year, the monthly value of secured finance declined -17.9%. Annual sales volumes have trended -13.3% lower compared to this time last year. Consumer sentiment through November also dropped a notable -6.9%.
“A lift in the cash rate of 300 basis points is noteworthy, because of the 300 basis point buffer on home loan serviceability assessment introduced by APRA in October last year. New variable home loan rates for owner occupiers increased from a low of 2.41% in April 2022, to 4.58% in October. Assuming the November and December increases to the cash rate are passed on in full, this could take average new variable rates to 5.08%.
“For those rolling off of low fixed-term rates, an average variable rate of 5.08% may create a ‘sticker shock’, noting average fixed-term rates of three years or less bottomed out at 1.95% for owner occupiers.” Owen said.
AMP Capital chief economist Shane Oliver said the rate hike when passed on to mortgage rates will mean that the amount a new buyer on average full-time earnings with a 20% deposit can pay for a home will have fallen 27% from what it was in April.
“So the downwards pressure on property prices will continue for some time yet even if the RBA soon pauses the cash rate.
“While global central banks are continuing to move rates up in faster increments its worth noting that the RBA meets 11 times a year compared to 8 or less for many other central banks and so it gets more goes at it. And compared to the US where 95% of mortgages are 30 year fixed rate loans Australian households are far more sensitive as 60% of mortgages are variable rate and the 40% on fixed rate loans are only short dated mostly going out 2 or 3 years.” Oliver concluded.
