Financial Market

Home buyers brace for financial pain as economy sits on knife-edge

A full percentage point increase would take the average repayment to $3592. Financial markets believe the RBA could have the official cash rate at 2.5 per cent by year’s end, which would translate into a monthly repayment on an $800,000 mortgage of $4295.

In Victoria, the monthly repayment on a $650,000 mortgage – currently at $2654 – would be $3450 if the cash rate sits at 2.5 per cent in December.

Masters said aiding the RBA was the high proportion of people either ahead on their repayments or on fixed mortgages. But by next year, as rates pushed higher and people rolled off low fixed-interest mortgages, there would be some pain for many Australians.

Masters, who is expecting a quarter percentage point rise on Tuesday, said it was not just an increase in mortgage repayments that could lead to trouble.

She cited Barrenjoey research showing the so-called “wealth effect” on the broader economy caused by a drop in house prices.

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Data this week from CoreLogic showed dwelling values edging down by 0.1 per cent in May, the first fall in 20 months.

House values fell by 1.1 per cent in Sydney, 0.8 per cent in Melbourne and 0.4 per cent in Canberra. The three are the highest-priced capitals in the country.

Between 2017 and 2019, house prices in most capital cities dropped as lending conditions were tightened. This contributed to a slowdown in household consumption and overall housing activity as home buyers felt less wealthy because of the decline in the value of their properties.

Masters said the RBA would be very aware of the potential flow-on effect from overly aggressive interest rate rises on the broader property market.

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AMP Capital chief economist Shane Oliver while it appeared even a small series of rate rises would knock consumer spending, the high proportion of people ahead on their mortgages would soften the blow.

The increased low- and middle-income tax offset that will start to flow to more than 10 million people from July 1 would also reduce the immediate financial pressures caused by higher interests.

But Oliver, who expects the cash rate to be between 1.5 and 2 per cent by year’s end, said it was dangerous to believe most home buyers could easily absorb rate rises, especially with house prices softening.

“While I expect that the economy can withstand more rate hikes, market expectations for 2.5 per cent by year’s end and over 3 per cent next year look over the top to me,” he said. “The RBA wants to slow spending to slow inflation, not crash the economy and knock inflation back to pre-pandemic levels.”

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