Australia’s richest people are the most worried about surging interest rates even though they don’t have to pay off a mortgage, a major bank has revealed.
A Westpac-Melbourne Institute consumer sentiment survey for July showed those who owned their own home outright were the most worried about rate rises to curb climbing inflation.
When asked about house prices those who owned their home outright gave a score of 78.9 in July – a monthly decline of 16.8 per cent.
Any reading below 100 indicates pessimists outnumber optimists.
Across all income groups, the survey of 1,200 people taken last week showed house price expectations to still be in the positive zone, with a score of 104.9 points.
Westpac chief economist Bill Evans said those who owned their own home were more focused on the prospect of home price falls.
‘Perhaps these experienced homeowners, who have seen cycles in the past, are more attuned to the damage sharp increases in interest rates can have on housing markets,’ he said.
Australia’s richest people are the most worried about surging interest rates even though they don’t have to pay off a mortgage, a major bank has revealed (pictured are upmarket houses in Melbourne)
House prices tipped to plunge
The Commonwealth Bank, Australia’s biggest home lender, is expecting Sydney and Melbourne home prices to plunge by 18 per cent over the next two years.
CBA is predicting an 11 per cent drop in Sydney home prices this year, followed by another 7 per cent decline in 2023 as interest rates kept rising.
Sydney’s median house price of $1.382million in June wasn’t far off the $1.374million level of December, with four straight months of decline unwinding gains at the start of 2022, CoreLogic data showed.
Should CBA’s prediction come true, Sydney’s mid-point house price would fall by $151,247 in 2022, back to $1.2234million, before losing another $85,660, to hit $1.138million.
The Commonwealth Bank is also forecasting a 10 per cent fall in Melbourne followed by another 8 per cent decline in 2023.
Melbourne’s median house price in June was $975,850, a level marginally below the $997,928 level of December.
A 10 per cent drop this year would see the mid-point house price drop by $99,792 to $898,135.
A further 8 per cent decline would see it fall by another $71,851 next year down to $826,284.
Westpac chief economist Bill Evans said those who owned their own home were more focused on the prospect of home price falls (pictured is a Melbourne auction in July)
Interest rate rise pain
Home borrowers since May have copped 1.25 percentage points of rate rises, marking the steepest increase over three consecutive months since 1994.
‘The cash rate has increased at a faster pace than we have seen in any cycle since 1994 and this is clearly unsettling for consumers also facing a sharp rise in the cost of living,’ Mr Evans said.
Westpac is expecting the Reserve Bank of Australia to raise the cash rate by another 0.5 percentage points in August, that would take it to a six-year high of 1.85 per cent.
The next RBA board meeting is occurring after the Australian Bureau of Statistics releases inflation data for the June quarter on July 27.
Headline inflation, also known as the consumer price index, surged by 5.1 per cent in the year to March – the fastest pace since 2001 as petrol prices climbed above $2 a litre.
Westpac is expecting the June quarter reading to show an annual inflation pace of 5.8 per cent.
ANZ is expecting an even higher reading of 6.3 per cent before inflation hits a 32-year-high of 7.4 per cent later this year.
This would be even worse than RBA governor Philip Lowe’s forecast of a 7 per cent inflation pace.
Home borrowers since May have copped 1.25 percentage points of rate rises, marking the steepest increase over three consecutive months since 1994 (pictured is a Melbourne house)
Westpac is now expecting the Reserve Bank cash rate to hit 2.6 per cent by February next year, which would be the highest since August 2013.
That is based on the RBA raising rates by 0.25 percentage points in November, December and February.
‘The board is committed to containing inflation over the medium term,’ Mr Evans said.
‘To deliver on this, and to contain inflation expectations, it will need to continue taking strong actions with policy, pushing the cash rate from a very stimulatory starting point to something well into the neutral zone.’
Another 50 basis point RBA increase next month would most likely see borrowers with an average $600,000 loan be forced to pay an extra $169 a month on their mortgage repayments.
And it would be on top of the $163 they will be hit with from July 15 in the wake of this month’s half a percentage point RBA rate rise.
That means a variable rate borrower with an average $600,000 loan, now paying off a CBA variable loan with a 2.89 per cent rate, would see their repayments surge by another $163 next week as their monthly mortgage repayments climbed from $2,495 to $2,658 to reflect their variable rate climbing to 3.39 per cent.
Another 50 basis point RBA rate increase in August would see this borrower’s monthly repayments soar by another $169 as their variable rate rose to 3.89 per cent, taking their monthly repayments to $2,827.
The RBA raised the cash rate by half a percentage point in July, taking it to 1.35 per cent, with the major banks from Friday set to raise their variable rates in response.
The June rate rise of 0.5 percentage points, taking the cash rate to 0.85 per cent, was the biggest monthly increase since February 2000.
This followed May’s 0.25 percentage point increase, with the first rate rise since November 2010 ending the era of the 0.1 per cent record-low cash rate.