Australian borrowers are now paying 59 per cent more for their mortgages than they were three years ago, and financial markets now expect even more rate rises in 2024.
In April 2021, Commonwealth Bank, Australia’s largest property lender, was offering variable mortgage rates of 2.69 per cent.
But three years later, variable rate borrowers now pay 6.69 percent.
For a borrower with an average mortgage of $600,000, monthly payments have increased from $2,431 to $3,868, or $17,244 a year.
Someone with an $800,000 mortgage (buying a $1 million home with a 20 per cent home loan deposit) would have seen their monthly payments rise to $5,157, up from $3,241.
That would equal a $22,992 increase in annual mortgage costs.
And despite rate rises, house prices have soared in Australia’s capital cities as immigration reached record levels, adding yet another hurdle for those struggling to buy a home.
The median house price in Sydney rose 10.7 per cent over the last year, but in Brisbane it rose 15.9 per cent and in Perth 20 per cent.
Australian borrowers are now paying 59 per cent more for their mortgages than they were three years ago, and financial markets now expect even more rate rises in 2024.
AMP chief economist Shane Oliver said Australian borrowers were much more likely to be on a variable interest rate, resulting in much larger increases in payments compared to the rest of the world.
AMP Capital chief economist Shane Oliver said with 98 per cent of Australian borrowers now on a variable rate, mortgage costs were rising much more dramatically than in the rest of the developed world, where fixed rates are more common. .
The 3.5 percentage point rise in Australia’s variable mortgage rates, even taking into account bank loan discounts, is more than double the levels in the UK and Germany, and is seven times more severe than the rise in US household borrowing costs.
“Australian homeowners with a mortgage pay on average more than three per cent more,” he told WhatsNew2Day Australia.
“In Canada it is only about 2.5 percent more, in Germany it is about 1.25 percent and in the United Kingdom it is 1.5 percent more.”
By comparison, average American borrowers paying off the same home would have seen only a 0.5 percentage point increase in their borrowing costs, because almost all of them have 30-year fixed rates in a nation where a government corporation finances mortgages.
“We don’t have Fannie Mae and Freddie Mac, but we don’t have those long-term contracts either,” Dr. Oliver said.
“Whether you’ve transacted or not, you’re paying the highest rate in Australia, even those who were on fixed rates two years ago, most of them have seen their rate drop to much higher levels.”
Three years ago, in April 2021, Sydney was several weeks away from entering an extended lockdown when the Reserve Bank of Australia’s cash rate was still at a record low of 0.1 per cent.
With Sydney and Melbourne closed for much of 2021, Commonwealth Bank in October that year cut its variable rate mortgages to 2.29 per cent.
This was despite inflation in the June 2021 quarter rising to 3.8 per cent, which at the time was the highest annual measure since 2008, and well above the RBA’s 2 to 3 per cent target. .
Three years later, economists are now talking about the prospect of more interest rate increases, even though borrowers endured 13 rate increases between May 2022 and November 2023.
The RBA cash rate rose to a 12-year high of 4.35 percent after inflation in late 2022 hit a 32-year high of 7.8 percent.
Headline inflation in the March quarter eased to 3.6 per cent, down from 4.1 per cent in the December quarter.
But underlying measures of inflation – excluding large price rises and falls – were worrying.
In April 2021, Commonwealth Bank, Australia’s largest property lender, was offering variable mortgage rates of 2.69 per cent (pictured, Michelle Bullock with her Reserve Bank Governor predecessor Philip Lowe).
For a borrower with an average mortgage of $600,000, monthly payments have risen to $3,868 from $2,431, or $17,244 a year (pictured is a house in Clontarf, near Redcliffe, selling for $750,000).
The weighted median measure, based on prices in the middle of the range, showed an increase of 4.4 percent.
The trimmed mean measure, the RBA’s preferred barometer that excludes extreme price movements for an average rise, showed core inflation rising 4 per cent.
Judo Bank now forecasts three more rate hikes in 2024, but its chief economic advisor, Warren Hogan, is not alone now, as bond and futures markets are also betting on more rate hikes.
The planned increases in August, September and November would take the RBA’s cash rate to 5.1 per cent, a level last seen in 2008 during the global financial crisis.
Until Wednesday, the Commonwealth Bank was forecasting three rate cuts by Christmas, but ANZ has since ruled out any rate cuts in 2024.
AMP now forecasts a rate cut in December, after having expected a cut in June.
“I would have thought the prospect of another rate hike was very low – about a week ago, maybe around 10 per cent, but now you’d have to say it’s around 20 or 25 per cent,” Dr Oliver said.
‘It looks like the rate cuts are going to be delayed.
“Many may have been expecting rate cuts at some point in the next six months, but that relief may not come until the end of the year or early next year.”
Financial markets are fickle and until recently the 30-day interbank futures market was forecasting three rate cuts in 2024.
But if rates rose three times as much, the average borrower with a $600,000 mortgage would see their monthly payments increase by another $303 to $4,171.
The borrower with an $800,000 mortgage would see his payments increase another $404 to $5,561.
In two and a half years, borrowers would have endured 16 interest rate increases, adding up to the most aggressive increases since 1989.
Mortgage rates have not risen at such an aggressive pace since rising to 18.5 per cent in November 1989, up from 10.63 per cent in April 1988, during the era before the RBA had a cash rate target and houses were much cheaper compared to income.
But in Sydney’s western suburbs, in a place like Blacktown, the increase would be even greater.
Judo Bank now forecasts three more rate hikes in 2024. Its chief economic advisor, Warren Hogan, is not alone, as bond and futures markets are also betting on more rate hikes.
By December, the contrast with the end of 2021 would be even starker than now.
A variable mortgage rate of 7.44 percent, up from 2.29 percent three years earlier, would mean an 80.9 percent increase in monthly payments.
For a $600,000 mortgage, that would mean payments would skyrocket to $4,171, up from $2,306 three years earlier, representing a $22,380 increase in annual servicing costs.
For an $800,000 mortgage, that would mean payments would skyrocket to $5,561, up from $2,486, equal to a $29,832 increase in annual loan costs.
In the year to September, a record 548,800 net migrants moved to Australia, but only 168,690 homes were built last year, leading to a surge in housing demand.
“There is a huge shortfall in the supply of new homes, which has led to a very tight rental market, which has also led to a very tight homebuyer market,” Dr Oliver said.
“That has negated the negative impact on house prices of higher interest rates.”