Hmmm…..
That same entrepreneur went into print again today. His final words (after discussing 3 banks that have failed in the US in just 3 days) were these:-
… they had substantial assets tied up in Treasuries – fixed rate securities. ………….. That’s not necessarily a problem. You can just hold them to maturity, and you just didn’t make as much money on them as you would have liked. But if you’re forced to sell them, you have to sell them at a loss. And you lose big money. ……………… this is what happens when you raise rates aggressively (too aggressively).
Is he right? Makes sense to me….. But then I’m just an ordinary bloke with an opinion. What’s yours?
If he is right, perhaps I should send this chap’s email to the RBA before they break something major here too !! :(
They’ve raised rates by 140% so far, with perhaps more to come? I think there are already many broken people…. when is enough going to be enough for these clowns?
Benny
Hmmm – so, after leaving a Cash Rate lift alone in April, what’s next from the RBA?
RBA Governor Phil Lowe recently shared a chart showing that even though Australia’s official cash-rate hasn’t risen as much or as fast as in other countries, the interest rates facing mortgage holders have, in fact, risen much more quickly. This is because the majority of mortgage rates in Australia are variable, rather than fixed, as is the case in other jurisdictions.
So, isn’t that even more of a reason to NOT push rates as high? Have the RBA been reading the tea-leaves and seeing how a huge chunk of the population has entered mortgage stress? Or are these people simply cannon fodder, thus expendable in the current climate?
However, one of the things that makes forecasting a little tricky at the moment is that an unusually large share of the market went on to fixed rates during Covid. Government policy made fixed rates exceptionally cheap during 2020, and many borrowers locked in record low rates.
Correct – but now, enter “the mortgage cliff”! There are a huge percentage of mortgagors whose fixed rates are due to expire by the end of this year. Thus another huge chunk of the populace who will face a near 140% rise in the Interest cost of their mortgage as they endeavour to re-finance, whether onto Variable or another Fixed Rate. Of course, like many others, they might also find they CAN’T refinance (with Qualifying Rates having been increased hugely over the last 12 months) so where will that leave them?
Could there be an even more drastic nose-diving of the economy as more and more face stress? Could that drastic development be the catalyst that sees the RBA ease up on the Cash Rate once more?
They did that in 2008 – increased the Cash Rate madly even as the rest of the world were cutting theirs (around the time of the GFC). I personally came out of some 6% Fixed Rates at the time into a 9%+ variable rate (a mere 50% increase back then as I had IO loans). That was a bit scary until later in the year (Sep08) when they realised they had got it wrong, and the Cash Rate plummeted about 300 basis points to 3.25 by Feb 2009. And they were cutting by 100 basis points each time to do it quickly.
Have a look here for the historical Cash Rates – https://www.rba.gov.au/statistics/cash-rate/
The rate today is back to slightly higher than things were in Feb09. Of course back then, the median house values were way lower than today, thus the mortgage amounts were also way lower. A quick trawl shows me the average house mortgage for all of Australia was around $250k in 2008, while today it appears to be nearer $600k. So Interest payments today would be around 140% higher than in 2008. Have wages kept up with that?
What’s the bet then? Is Australia going to be driven into recession? Or will the RBA learn the error of their ways in time to prevent a crash?
Place your bets ladies and gentlemen ! :)
Another 0.25% (sorry, that’s 10%) rise in the Cash Rate yesterday.
Or will the RBA learn the error of their ways in time to prevent a crash?
Nope – seems not !!!!!
And now time to update this quote:-
Thus another huge chunk of the populace who will face a near 140% rise in the Interest cost of their mortgage as they endeavour to re-finance, whether onto Variable or another Fixed Rate.
Better make that 150%.
150%? How does anyone handle that? They are wondering why there is a rental crisis in Queensland – after changing State laws to put the tenant into prime position and sticking it to the landlords a year or two back, the RBA is now having a crack. And they are wondering why rents are climbing 10% to 20% – those that haven’t already sold their investment properties that is?
I think I also read that around 50% of landlords are not rolling in dough either – they are just Mums and Dads having a crack at making their futures better. So what will it take for the RBA to see sense and stop this stupidity? Do we have to have half of the businesses close, unemployment to get back into the teens, bankruptcies and suicides rise, or what? (It feels like Covid all over again).
Or do we simply get a new RBA boss in place? Can’t wait……. :(
Mr. “Cash Rate shouldn’t rise before 2024” should go – before September !!!
Benny
A further 10% yesterday – when will it stop? Or are we beholden to the rest of the world, and must keep our Rates high to keep those fires burning? I hear more and more:-
– People living in cars (rental shortages and hiked rents forcing folks out of their accommodation)
– Businesses being hit with higher power costs along with mortgage interest, thus having to cut staff (which then affects other households’ incomes)
– Fuel going up which forces all commodity prices up (thanks to delivery costs)
– All of which mean NON-discretionary spending is increasing leading to a cut in discretionary spending (so, less meals out, thus affecting businesses, which affects other households as staff are laid off)…..
– etc, etc, etc
Is a recession imminent? Could be, but that depends who will win as we now seem to have the Fed Govt with their foot on the accelerator while the RBA keeps its foot on the brake of our economy.
As this drama goes on and on, I question (again) WHO decided that a 2% growth is ideal ALL the time? Surely it is reasonable to allow higher and lower growth depending on factors in play at particular times? Wasn’t it China that was growing at 12% per annum a few years back – they seemed to come out of it alright. So again, “Who says 2 – 3% is best?” And why? And when?
What do YOU think?
Meanwhile I feel for all those doing it tough while this ridiculous arm-wrestle between the Govt and the RBA goes on……
Benny
The following cartoon had me splitting my sides – a golden pictorial comment from Brett Lethbridge, a well-known cartoonist.
https://content.api.news/v3/images/bin/000155924091cdcedf53ce7caf5b4ce2
And doesn’t it just “tell it like it is” !!
:)
Correct – but now, enter “the mortgage cliff”! There are a huge percentage of mortgagors whose fixed rates are due to expire by the end of this year. Thus another huge chunk of the populace who will face a near 140% rise in the Interest cost of their mortgage as they endeavour to re-finance, whether onto Variable or another Fixed Rate. Of course, like many others, they might also find they CAN’T refinance (with Qualifying Rates having been increased hugely over the last 12 months) so where will that leave them?
I’m hearing so much about the mortgage cliff and how its going to crash the market. Especially from the mainstream media. Not to be too tinfoil hatty, but I feel like when the mainstream media harp on about something this much, there’s usually an agenda, and the opposite of what they’re saying is true.
Now my question is, when these mortgage cliff victims have to sell their homes, where do they go? They still need somewhere to live. So they rent, propping up the rental market, or buy elsewhere, which changes nothing. So will the overall market really be hit that badly?
The only damaging argument might be if they all just bunk in with family members, or if it’s mainly investors who then sell to new owner/occupiers. But this probably will not make up the majority of cases.
Hi Toby,
An interesting question, and some good thought behind your words.
I feel like when the mainstream media harp on about something this much, there’s usually an agenda, and the opposite of what they’re saying is true.
Hehe, I wondered if your comment was too kind to the mainstream media – my thoughts re many of them is that they have no idea, in which case forget an agenda. :) But then, there are some good commentators, and I think it can be worth considering their views.
I heard just yesterday that Westpac are looking at adjusting their Qualifying Rate (and about time too in my book). Back in the day, 2% was the normal QR, and I believe it made sense to increase it to 3% as the Cash Rate dived to unheard of levels (0.1%? Such a brain-dead move in my book). Why was it EVER deemed to be sensible to go THAT low?
Anyway, back to the QR – for those new to investing, the Qualifying Rate is applied by lenders to your situation as you apply for a loan. They take the Interest Rate of the day and add 3% to it – if your income and other figures still say “Yes” to getting the loan, then you’re good. The problem today is that, after a period with such low rates, and new borrowers taking on new loans, and THEN having their Interest Rates increased by 160%, they strike problems. Even if they have Equity in their houses, a lender will add a further 3% as they consider whether to grant a loan. In my view, with the Cash Rate having screamed upward, surely it is unlikely to go a further 3% higher any time soon. So, why keep it so high? Go Westpac !!
Of course, Toby, there is always “the other side of a story” and lenders still WANT to lend. Hence Westpac’s move – will others follow? Hmm, it’s perhaps likely !! And then, perhaps Labor will NOT renew Phillip Lowe’s gig come September – what will THAT look like? Could it be that Rates may go down again, especially if it appears that we are heading for recession? Perhaps the new Governor won’t be so hellbent on getting Inflation down to 2% overnight. But then, the rest of the world and its situation will play a part in our economy too. Maybe we CAN’T reduce our rates as we still want to attract investment.
As always, things morph as time passes. Just HOW things will morph is yet to be seen. There are WAY more inputs than just one thing that affects the path into the future when it comes to an economy. Consider the thoughts so far that have been espoused in the media. Houses were going to crash during Covid – they dropped (for three months) then off they went again in a boom. Today, even as Cash Rates rise, property (for now) is still increasing in price all over. As are Rents.
Now my question is, when these mortgage cliff victims have to sell their homes, where do they go? They still need somewhere to live. So they rent, propping up the rental market, or buy elsewhere, which changes nothing. So will the overall market really be hit that badly?
My crystal ball is cloudy right now, but I think it is good to consider all sides when making a call. And keep looking for deals that are around that fit with your situation. Best I can think right now is to quote my recollections of Steve’s teachings – i.e.
Look to make the quickest profit in the shortest time, for the least risk and lowest aggravation. AND
Always have an Exit planned before buying in to a property AND
Do deals that make money not lose it (ie.. don’t negative gear) AND
Success comes from doing things differently… (to most others?)
I know he says a heap more, but those few will keep you on the right side of the equation. And by the way, Toby, that was a great question. I’d love to see others’ views re the same.
Benny
My personal thought on this is, between RBA and the government. They should make a choice of:
Either:
a) do whatever it takes to prevent a recession
or
b) Jack up the rates to however high out of necessity to fight inflation
Yes, either choice would suck for a group of general population or another, but at least it brings results and outcome. By that, it means we have a clear direction and can overcome challenges with the chosen path.
But instead now they are being greedy and trying to do both…. and by doing both, I foresee they will end up achieving neither, and all it does is just keep everybody hanging and making everybody suffer.
Seriously, sometimes I feel like say the F word to them.
I hear this morning that Philip Lowe’s contract will not be renewed come September, and that a new governor will be announced later this week. I’m not sure if it fills me with confidence just yet, but time will tell. I imagine Mr Lowe will remain around until September anyway, occupying the Governor role for two more months. After that, who knows?
At least by September we should have a fair idea just how things are travelling economy-wise. But that won’t stop the RBA from lifting rates in Aug and Sep if the mood takes them….. Hopefully though, this change might haul them up for a bit and allow them time to contemplate their respective navels.
Here’s hoping…….
:)
An interesting article arrived in my Inbox today – it came courtesy of an ABC news reporter in this article:-
The report contains an interview with Sebastian Watkins, the co-founder of Lendi who said this – “Lendi merged with Aussie Home Loans in 2021. The combined group now has more than $100 billion in loans. And not all of the customers are going to be able to keep their houses. It’s a substantial shift, you’re talking about some people paying 3 or 4 per cent more on their mortgage … overnight,” Mr Watkins says. (Is that perhaps the “Understatement of the Year”?) His focus was on the mortgage cliff ahead, as folks come off a low Fixed Interest Rate onto current newly-high variable rates. But it was that “3 or 4 percent” that always gets me…..
3 or 4 percent? Of course, he is right, and yet he’s not right too – as (you’ve read it here before) that “3 or 4 percent” is likely to morph into 100% or more once that miniscule 3 or 4 percent is added to their mortgage interest rate.
Mr Watkins also said “I think it’s incredibly concerning – I don’t think we talked about it enough, there’s going to be a severe amount of whiplash.”
For sure, powers that be should be talking about, or at least thinking about it. The RBA in particular.
A quote from a local investor reads thus: “CBA reckon that only about 60% of the recent hiking cycle has been passed through to the market, thanks to the insulation of fixed rates. That means that the RBA can do nothing, and there’ll still be a substantial amount of tightening to come, which is also why they SHOULD do nothing. Inflation is easing, households are feeling the pinch, and there’s still more to come.”
The only question now is “WILL the RBA do nothing, or will they continue with their brain-dead antics and lift rates yet again?” You and I know what they should do, but time will tell.
The only question now is “WILL the RBA do nothing, or will they continue with their brain-dead antics and lift rates yet again?” You and I know what they should do, but time will tell.
The news today is that the rates remain on hold for another month – or is that 6 weeks (given that the “new look RBA” is talking of having just eight meetings per year instead of eleven as it has been).
Whatever, with one voice on local radio saying that “Those on a mortgage cliff that currently pay $3100 a month on their mortgage will soon be paying $5000 a month, thanks to the Interest Rate increases applying once their Fixed Rate expires.” So, a 60% increase !! I hope they’ve had a good wage increase recently.
I hope the RBA keep up with the recent practice of leaving the cash rate on hold while we wait to get news on inflation figures as the months pass.
Benny
And just this morning, our local paper has found figures that confirm that some investors are bailing out (often just to save their own homes) as things are just getting too tough.
Apologies if this needs you to register with the CourierMail or buy to read it. I have a subscription, so I just read it. To help though, here are a few salient points from the article:-
– Landlords are fleeing the market as the financial stress of meeting rising mortgage repayments worsens, only putting further pressure on the rental supply crisis. The portion of investor-owned property sales across Queensland ballooned to nearly a third of all homes sold in June — jumping about 8 per cent in just one month to 29.5 per cent — higher than any other state, according to new research by PropTrack.
– Industry experts say property investors are selling because they can no longer afford rising rates, increased management costs and new government regulations.
– The Queensland government implemented new legislation that came into effect on July 1 prohibiting landlords from increasing rent more than once a year. Back in June 2022, it also introduced legislation that would calculate land tax based on an owner’s entire Australian property portfolio, rather than solely on properties held within Queensland. That announcement triggered a strong backlash, prompting the government to abandon the proposed changes in September last year. But MCG Quantity Surveyors managing director Mike Mortlock said the damage had already been done.
– government disincentives and negative sentiment towards property investors were forcing investors to sell up
– Brisbane mortgage broker Glen Barnes of Barnes Finance Solutions said mortgage repayments now “far exceed” rent returns. “Generally speaking, investment property holdings for some owners is now too much coupled with the mortgages on their principal places of residence and other general cost of living pressures,” Mr Barnes said.
How are things where YOU are? With rental vacancy rates around 1%, and this article showing it may well get worse, I shudder to think where we’ll be next year. Along with a fresh RBA, a fresh State Govt wouldn’t hurt – some of their brain-dead antics have helped fuel this disgrace.
First time poster here, and I’m a bit late to this one lol but I wanted to add to your question.
The Aus gov is bringing in a record number of people over the next few years, which will dampen wage growth and drive up property and rental values. Couple this with ANOTHER predicted rate rise (I just listened to a podcast on this, obviously it’s not a crystal ball: https://www.propertylovers.com.au/podcast/the-current-state-of-the-australian-property-market-property-lovers-podcast/) , how will Australians cope? What is the government thinking?
Side note: Increased demand for housing, issues in the construction industry that are restricting supply, and rates expected to begin to decline at the end of next year…is it just me or is property going to become literally unaffordable to future generations?
Hi Lukey,
Is it just me or is property going to become literally unaffordable to future generations?
It’s a good question. I think it is a perennial question too. I recall hearing similar questions for the last decades that I have been aware of. Back in the day, 3 years of a wage would buy the average house (1950’s and 60’s). Things changed over time – probably as our options changed. e.g. As women going to work became the norm, prices rose to accommodate the extra income available. Or was it the other way around? Did women go to work as prices became higher – which was the chicken, and which the egg? I’m not sure.
I do recall hearing some time back that it took 3 generations for a Japanese family to purchase a family home. We’re not there yet, but are we headed there? Could be perhaps…..
Anyway, your question reminded me of an earlier post that pointed to a world map showing the “number of years of wages needed to buy a house country-by-country”, and I thought it is an opportune time to re-post that link. https://www.numbeo.com/property-investment/rankings_by_country.jsp
From that link, you can see that Australia now sits at around 10years of wages to buy a house. NZ is similar, but some other countries require 30 to 40 years of a wage to buy in their country. There is another map I have yet to find that allows you to hover over cities individually (e.g. Sydney, Melbourne, Adelaide, etc) rather than a country average. Here’s that link too. https://www.numbeo.com/property-investment/gmaps_rankings.jsp
Benny
Well, here we are another month or two down the track. Yep, the Cash Rate went up again on Melbourne Cup day. Needed? Not in my book (as you probably know already….) but with Govt continuing to spend up large while all mortgage holders get hammered, the “basket of goods” showed inflation was “still not coming down quickly enough!” Spare me !
On a quick reread, this quote from a few posts back deserves more thought –
Brisbane mortgage broker Glen Barnes of Barnes Finance Solutions said mortgage repayments now “far exceed” rent returns. “Generally speaking, investment property holdings for some owners is now too much coupled with the mortgages on their principal places of residence and other general cost of living pressures,” Mr Barnes said.
If you’ve kept up from the start of this topic, you’ll already know that many mortgage costs have doubled and more over the last 18 months. Lucky is the landlord who is able to double any rents payable. And if not, then pain is the result. Add to it the overall cost of living outside any property investments and it is not hard to understand why folks are struggling.
Meanwhile, our current Govt sits idly by and allows the 25c reduction of fuel excise set up by the Morrison Govt to expire without fanfare, so up go fuel costs (part of the parcel of goods on which CPI is measured). Oh, and they logged a budget surplus – ‘twould be nice if they used $3bn or so to reinstate that fuel excise reduction. Might even gain them a few brownie points were they to do something meaningful like that. It might even allow more folks to feed their kids, or cover a rent increase that would otherwise have them sleeping in their cars.
That 25c saving would apply across the board, leading to reductions in cartage costs, thus impacting on delivery costs to supermarkets and other stores, thus lowering food prices and having a beneficial impact on the CPI, thus keeping the RBA happier. Isn’t it as simple as that? And yeah, that’s just one aspect where the Fed Govt could make a world of difference quickly. Another is to stop spending themselves. If we all need to cut costs, why not the Govt too?
More and more, I think it is time the RBA became an elected body, so we can throw them out when they are making poor decisions.
I know, I know, there are two sides to every story – what’s theirs? What’s yours? How are YOU travelling in this
bravescarey new world?Benny
Well hey, I am now hearing of 6 likely rate cuts starting early in 2024. Oh, wait – that is for the Federal Reserve – i.e. the USA. Did THEY go too far, too fast too? And was our RBA simply following their moves blindly? Hopefully not – but it looks a lot like they may have been…….
So what now? Are we really likely to have 6 x 0.25% drops this year? That would help a lot of people, but I’m afraid it all just makes me rather angry. I think about how many folks might have been forced to sell up, or lose their business, or go live in a tent, or even suicide, or some other drastic measure – just because our “higher-ups” at the RBA weren’t too good at reading the tea-leaves relating to our economy, and they cranked Int Rates way out of sight!
As I said to my wife “Don’t get me started…….” It all just seems too raw, too stupid, and too damned pigheaded of the RBA. I think you already knew MY thoughts (just start at post #1 ;). But what do YOU think of what has transpired over the last 2 years, with a likely partial unwinding yet to come?
Benny
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