Fixed Interest & BondsProperty

I just can't blow bubbles any more

17 Jun 2022 1 month(s) ago

How high are interest rates going to go? The futures market is sending some dark signals.

The two decade housing bubble that has propped up the Australian economy looks like it might finally be pooping. CoreLogic’s daily dwelling values index, which measures price growth across the five major capitals, fell by 0.22% in the week ended 16 June. This was the largest weekly decline since July 2020 during the depths of the pandemic:

Sydney and Melbourne, the two most overpriced markets, drove the fall, but Brisbane was also down. In June to date, values have fallen by 0.27% with Sydney (-0.61%) and Melbourne (-0.44%) suffering heavy falls. Values have risen across the other major capitals, however.

So far, these are comparatively modest movements and prices are still up for the year. Momentum at this level is always going to be hard to stop.

Everything depends on where interest rates are heading. The era of cheap debt is coming to an end but how much pressure will indebted households come under? If rates stay in the 2.5-3% range perhaps it is manageable, but the futures markets is pointing to something much higher.

According to that market’s latest implied yield curve, Australia’s official cash rate will rise to around 3.6% by December and to 4.2% by May next year. That spells major stress:

If this came to pass it would be the sharpest interest rate rise in Australian history. Here is notionally what it would look like:

Are we looking at more than 7% base rates to wring inflation out of the system? If so, prepare for mortgage rates of more than 9%.

All asset classes will be affected and the only consolation is that the problems in energy and food that are hammering Western economies should be slightly less severe Down Under. But we will be caught in this global storm.


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