Consumer Confidence Continues To Weaken…Where Are We Heading?
With consumer confidence continuing to weaken due to worrying inflation and interest rate rises, Friday's updated interest rate outlook by the CBA will only add to the uncertainty.
With unemployment now at the incredibly low rate of just 3.5% and spending still high, the CBA are predicting further 0.5% interest rate rises in August and again in September. If the Commonwealth Bank is correct, the ramifications are enormous for the property market, particularly for those who have purchased over the past year or two during a time when the RBA promised that rates wouldn't rise until at least 2024.
To put the predicted rate increases into context, the average new mortgage in Australia is around $630,000. If you took out a loan in April this year for $630,000 as opposed to taking out the same loan in September this year, the predicted 2% increase adds an extra $12,600 p/a to the mortgage. Please also remember there was an interest rate increase in April and there are more predicted post September further adding to the stress.
One has to ask how many mortgage holders will be able to afford these increases, especially when you consider that the extra $1,050 per month needed is after dealing with increasing cost of living expenses.
Interest rate increases also severely impact's borrowing capacity.
Based on a 2% cash rate increase, an average borrower would be expected to have a reduced borrowing capacity of approx 23% based on the average mortgage of $630,000.
So what does this all mean?
Based on the law of averages, no matter how much the average buyer loves a property, where they previously had the ability of potentially borrowing approx $630,000 to purchase in April, this figure will have changed to approx $485,000 by September.
What impact will this have on prices? Only time will tell.
Please see below the full article on the CBA's interest rate outlook.
Interest rates tipped to climb higher at an 'incredible pace'
The nation's biggest lender expects the Reserve Bank of Australia will increase interest rates even more aggressively, predicting an unprecedented four double hikes in a row.
While the RBA board is widely expected to lift the cash rate by 50 basis points for the third consecutive month in August, Commonwealth Bank of Australia economists now point to a fourth supersized rise in September.
CBA head of Australian economics Gareth Aird noted that if the RBA delivers 100 basis points of tightening over the next two meetings, it will have lifted the cash rate by 225 basis points since May.
"This would represent an incredible pace of tightening, particularly given the starting point was a cash rate of just 0.1% and household debt sits at a record high as a share of income," Mr Aird said.
"The impact on households with a mortgage will be very significant given the percentage change in the mortgage rate will be incredibly large."
Mr Aird said some households with a home loan will be insulated, at least initially, if they are on a fixed rate loan.
"But the majority of home borrowers are on floating rate loans and the interest cost on their debt will go up very quickly."
The CBA team updated their cash rate forecasts on Friday, a day after news that Australia's unemployment rate fell to 3.5% in June - the lowest level since August 1974.
The revision was also tied to CBA's expectation that the RBA will follow the path of a number of other global central banks in aggressively hiking the policy rate over coming months, Mr Aird said.
CBA expects the cash rate to peak at 2.6% after one further rise of 25 basis points in November, and continues to predict rate cuts of 50 basis points in the second half of 2023.
Analysis by comparison site RateCity showed if the cash rate hits 2.6% in November, monthly repayments for someone with a $500,000 mortgage will have risen by $687 in total since May. For someone with a $1 million mortgage, repayments could rise by $1373 in total.
"Borrowers need to strap in for one of the fastest rises to the cash rate in our history," Ratecity research director Sally Tindall said.
"The last time the RBA hiked the cash rate this quickly was back in 1994, when the central bank increased rates by 2.75% in the space of just five months.
"This is turning into a pressure cooker situation for many borrowers," she added.
AMP chief economist Shane Oliver said he expects another 50 basis point hike in August, given ongoing concern about high and still rising inflation and the need to prevent inflation expectations moving higher.
But he said another "blowout" inflation result when the consumer price index data is released on July 27 could push the RBA to a 75 basis point hike in August.
"The move by the Bank of Canada to hike by 1% and the possibility of the same by the Fed [US Federal Reserve] later this month suggest that the RBA may hike by 0.75%, particularly if the June quarter CPI is another shocker.
"However, we lean to the view that 0.75%+ hikes will be avoided in Australia."
Dr Oliver said the RBA meets monthly whereas the Fed and Bank of Canada only meet six weekly, and inflation and wage pressures are "a bit less" in Australia than they are in the US and Canada.
"We continue to see the peak in the cash rate being around 2.5% in the first half of next year, but the risks are on the upside and it could come earlier given the extent of inflation pressures."
CBA's Mr Aird said the risk of a 75 basis point move in August is low.
"The RBA board meets more frequently than most other central banks which reduces the need to deliver such a large hike at any given monthly meeting," he said.
Westpac chief economist Bill Evans on Friday said they continue to expect a 50 basis point increase in August, but a pause in the tightening cycle in September now seems unlikely.
He pointed to a 25 basis point rise in September before a pause in October. That did not change Westpac's forecast for the cash rate to peak at 2.6% in February.
Please see below the latest National Consumer Confidence Graph & Report
