Each week at auctions across the country, participants are rushing to get in now before the price of property falls further and before the RBA lifts rates to a higher level not seen for over 20 years. Odd logic, but that is what’s happening.
Another part of that scenario came to fruition today when the Reserve Bank (RBA) met for its September meeting and the board raised the cash rate by another 50 basis points.
This latest rate rise is the continued warning the RBA is flagging to prospective buyers that need to come to the realisation only a fool thinks it’s smart to purchase of property in this current market of highest ever prices.
Those that purchase over the next three months run the risk of seeing their asset lose 30% or more and interest rates on their loan doubling as quickly as 2023.
For those already pulled into the property ownership dream from a small deposit starting base, but backed by generous government bonus schemes to buy, the average new loan level of $500,000 will now increase in repayments by $144 a month.
In fairness to borrowers, the RBA did clearly indicate in late 20201 that they did not expect interest rates to increase before 2024.
And even as recently as April 2022 the cash rate was almost nil, sitting at a mere 0.10% – prompting many more to enter an escalating price real estate market, before they missed out.
When the RBA unexpectantly lifted the cash rate on 3 May 2022 by 25 basis points, the cash rate lifted to 0.35%, but was mostly ignored or misunderstood by the fever pitch surrounding want to be homeowners.
With no reverence paid to this early warning shot by the RBA, the property market continued at fever pitch.
But, the RBA was about to show its undeniable interference in everyday life decisions as it increased the base rate by 50 basis points in June, July. August and now September 2022 to a base rate of 2.35%.
For those with a $500,000 loan it represents an increase of more than $600 a month of additional interest repayments since April 2022.
And for those still contemplating a property purchase, it doesn’t end here with predictions of a cash rate sitting at a smug little 3.60% early in 2023, and that equates to the bank charging homeowners a neat 8.60% interest rate on a variable loan.
By the time rates reach 8.60%, that will add a further $360 a month in increased interest rate repayments, $960 a month more than when the RBA said no more rate rises until 2024.
Many parents of current new homeowners once sat children on their knee and explained why they had to leave their property in 1990 when then treasurer Paul Keating presided over interest rates on mortgages climbing to 17.5%, and for some distressed buyers they were slugged for up to a peak of 22%.
Many homeowners at the time could no longer afford their repayments and when their lenders came knocking had no choice but to walk out, with a red mark against their name.
With interest rates doing nothing but falling since 2010, current homeowners have had no reason to reference this obvious aberration in the market. But to the surprise of many they will get to relive the horror of those 17.5% interest rates.
When interest rates were 17.5% in 1990, the average new loan was less than $250,000.
Today the average new loan is $500,000, and with interest rates looming at 8.60% in early 2023, but with no ceiling they will stop there, it is actually a similar interest rate repayment faced by borrowers today, as those in 1990.
What will be taken from this current rate rise is at the time the RBA lowered the cash rate to 0.10% at the end of 2020 during the Covid-19 pandemic, a record low, the RBA governor said at the time they didn’t plan on raising the cash rate again until 2024.
With more rate hikes still to come a suitable sacrifice will be required to quell the immediate howls from homeowners who feel they have been terribly misled.
But don’t expect that sacrifice to do little more than maybe get a one month reprieve from interest rake hikes as the RBA resets its aim on quelling inflation.
