Huge myth about interest rate hikes debunked

When interest rates started rising this year, many Australians thought it would be their chance for a break, but all is not as it seems.

As interest rates began to rise this year, many Australians were concerned about the impact of the move to take the sting out of rising inflation.

Australians with large mortgages were among the most concerned, but there were also key demographics deemed winners in the new norm of rising interest rates.

Pensioners with a lot of savings were one, but it was a battered generation of younger Australians looking to gain a foothold in the housing market that saw the RBA’s decision in the most positive light.

They had been pushed aside as real estate prices continued to rise to astronomical levels – slipping further and further out of reach as time went on.

The RBA’s rate hikes offered a glimmer of hope that house prices would fall; and we are already starting to see real estate prices falling.

House prices fell by 0.1 percent nationwide in May, the first monthly decline since September 2020. Experts are now warning that this may be possible over the next 18 months across Australia by as much as 20 percent.

However, this may not be the big win some younger Australians think it is.

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Housing affordability is deteriorating

In an explosive report, analysts from Moody’s Investors Service said even if house prices fell by more than 20 percent, it wouldn’t solve the country’s affordability crisis.

In fact, they say it would make it worse, as higher interest rates will make it harder for new buyers to pay off their mortgage, even on much cheaper homes.

They said the average two-income Aussie household needed 25.7 percent of their monthly income in January to pay the repayments on a new mortgage. By May, that had risen to 26.8 percent, and they expect it to rise further.

When we talk about the two major cities, Sydney and Melbourne, that figure becomes even more alarming. Average households in Sydney needed 37 percent of their income to repay their loan. In Melbourne, according to the survey, they needed 29.8 percent.

Moody’s analysts say affordability will continue to fall despite falling real estate prices, as rising interest rates will push up mortgage payments.

“We expect house prices to fall through the remainder of this year and into 2023 as rising interest rates weigh on property market sentiment,” they said.

“Based on our assessment of various home price and interest rate scenarios, we do not expect prices to fall to the extent that housing affordability improves as interest rates rise this year.”

Moody’s modeling shows that if the RBA raises the cash rate to 2.85 percent and real estate prices fall about 10 percent, housing affordability will continue to deteriorate.

“If the RBA raises the spot rate to 2.85 percent this year, our modeling shows that housing affordability will continue to deteriorate unless home prices fall by about 22 percent, a significantly larger drop than we currently expect by the end of the year.” this year,” Moody’s said.

ANZ, meanwhile, has forecast that cash interest rates will reach 2.6 percent early next year, which the bank’s economists say will plunge real estate prices by 5 percent in 2022 and another 10 percent next year.

Moody’s warned, however, that even if spot rates ended the year at 2.35 percent, home prices would have to fall 22 percent to see even a small improvement in affordability.

RBA chief speaks amid rising inflation

Reserve Bank Governor Philip Lowe will deliver a talk today entitled “Inflation and Monetary Policy” to the US Chamber of Commerce in Australia.

He is expected to talk about comments he made last week in a rare television interview on ABC’s 7.30 in which he said the bank would do everything it can to bring inflation back to within the RBA’s 2-3 percent target.

In that interview, he predicted that inflation would be 7 percent by Christmas and would not begin to fall until the first quarter of the following year, while cash interest would be 2.5 percent.

“I think Australians… need to be prepared for higher interest rates,” said Dr. lowe.

“We had emergency settings during the pandemic, I think that was the right thing to do, but the emergency is over. And it is time to remove the emergency settings and move to more normal monetary policy settings.”

dr. Lowe said he believed it was “reasonable for interest rates to rise to 2.5 percent at some point”.

He added that the RBA would do “whatever it takes” to address rising inflation.

“It’s unclear at this point how far interest rates need to rise to get that,” said Dr. lowe.

“I’m convinced that inflation will come down over time, but we’re going to have to have higher interest rates to get that result.”

Read related topics:Cost of livingReserve Bank

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