Are these numbers correct on Mortage Stress when the RBA gets the cash rate to 3.5% eventually?

[cindychar]

Couple earning 2 x $80,000 AUD
= $63,000 post tax annually individually
= $126,000 post tax annually as a couple

Mortage on a $1M property repayments on with a 10% deposit (Loan = $900,000)

1% Interest Rate = $2,925 p/month
- $35,100 per year Mortgage

2% Interest Rate = $3,361 p/month
- $40,332 per year Mortgage

3% Interest Rate = $3,833 p/month
- $45,999 per year Mortgage

4% Interest Rate = $4,341 p/month
- $51,832 per year Mortgage

 

[conandew]

@cindychar If you want to model mortgage stress you should go much further than 4%. It’s not that long ago that 5-6% was the norm or even considered lowish.

https://www.finder.com.au/historical-home-loan-interest-rates

 

[nina_1989]

@conandew 7.5% less than a 10 years ago.

Third of the life a mortgage but so many like to pretend it can’t happen again.

 

[conandew]

@nina_1989 Yep I remember being excited about our SVR dropping to 5.19% after the 7-8% period.

 

[resjudicata]

@nina_1989 Sure, but 7.5% would crash the economy.

Increasing interest rates function to put the brakes on the economy. What scenario would require that kind of braking?

 

[llg06]

@resjudicata High inflation and low wage growth would also crash the economy. Get stuck between a rock and a hard place.

 

[isaiahak7]

@resjudicata 1980s with inflation of 9.3% and wage growth of 10.3%.

Imagine earning 20k buying a house for 88k Sydney with a standard 50% to mortgage and your wage went up by $2060 vs your 10k cost of living up by $930. I think the recession was a reset.

 

[amelia97]

@resjudicata Runaway inflation? There comes a point where you can't postpone the (totally normal and expected part of a capitalist economy) economic contraction any more

 

[nina_1989]

@resjudicata It’s not their only function. Or more precisely not in isolation. Without breaking out matlab I would guess that the largest risk factor is interest rates globally and the knock on effects on the exchange rates.

The fact that the RBA has found itself in a position where it is much more limited in its ability to change interest rates is, in and of itself, a problem.

Of course a 7.5% mortgage rate doesn’t mean that the base rate is that. You’d start seeing mortgage rates around their at around base rate 4% for certain borrowers. Given the US is expected to make 4 interest rate rises this year (in October 1 was expected) and has said they’re going to shrink their balance sheet at the same time, you could easily find a sliding aussie dollar, impact on the balance of trade and necessity to increase the interest rates. All from extrinsic factors.

Do I think a 4% base rate will happen in the next 5 years.

Can it. Sure.

 

[ottostern]

@resjudicata That assumes the RBA has a choice.

Plenty of scenarios where the RBA is forced into higher interest rates.

 

[resjudicata]

Yep. People don't seem to understand the whole neutral rate framework. The neutral rate (here and elsewhere) has been declining for decades, for deep, slow-moving reasons (demographic change, rising inequality, the rise of China). Those deep factors aren't just going to reverse overnight. As a result, a cash rate that would've been roughly neutral a decade ago would be heavily contractionary now, so the Bank is very unlikely to hike rates that high unless we're faced with a massive spike in inflation that was expected to be non-transitory!

 

[ottostern]

@resjudicata That would be economists outside the RBA. The RBA'S own economists might have a different perspective, and it's the RBA that sets the rates, not external opinion.

 

[resjudicata]

@ottostern Ultimately if the RBA is wrong about the neutral rate (eg. thinks it's 3.5% but it's actually 2.5%) this will be reflected in economic outcomes and the bank will be forced to adjust.

 

[ottostern]

@resjudicata Eventually...and possibly.

Eventually because if it thinks a big rise is warranted, then it will act on what it believes. So the rise will happen. Then, if the market reacts negatively it will still take time for the RBA to reverse its decision. Further, if the market reaction is severe, then the RBA might be forced to change, but what if it's something the RBA thinks it can tough out? That might mean, yeah it eventually shifts back, but that could be quite some time. Oh, and that assumes that the economists predicting smaller rises are right. On past outcomes, I'd give them an even chance of being right, but I wouldn't put my money on it.

So, yes, it might happen like you say, in theory and over a possibly extended time..if economists with a not so stellar prediction record are right.