There’s one age group and one state that will be hit the hardest by cash rate hikes — and it’s no surprise who will fare the most.
The market expects official interest rates to reach 3% by the end of the year. That’s a huge jump from official interest rates of 0.35% currently, and should push mortgage interest rates to over 5%.
If you haven’t checked what interest rates should do lately, the recent shift might come as a shock. We always knew that interest rates were going to rise this year, but expectations about how big they were have skyrocketed.
This means a surge in mortgage repayments, as shown in the following chart. By December, the average Aussie who took out a new 30-year mortgage in January 2022 will be paying $1079 a month more than in January 2021 – assuming they have a variable rate mortgage, assuming that banks pass on increases in official interest rates and assuming that the market expects interest rates to come true.
The pain will hit hardest in places where lending is greatest: In Australia, new mortgages are greatest in New South Wales, because that’s where house prices are highest. students.
Now you might be wondering, this sounds bad, but should we trust market expectations for future interest rates? The answer isn’t to trust them exactly, but they can sometimes serve as a helpful guide.
For example, when the RBA said it would not raise rates in 2022, and possibly not even in 2023, market expectations were pretty convinced that was nonsense. Markets had “priced in” a rate hike in 2022. That’s exactly what we got this week when the RBA raised official interest rates for the first time in over a decade.
On the other hand, as shown by the difference between the faint lines and the light lines in the chart above, interest rate expectations can change a lot in a short time. So take the above chart for reference only.
Suffering for the thirties
Where else does suffering fall when rates rise?
One answer is that the old will not suffer as much as the young. For starters, the old ones are most likely to have money in the bank, which, if banks go through interest rate hikes, should finally start earning interest again. But also, at the time of retirement, home loans decrease and many fewer households have them.
The biggest hit will be for people in their late 30s who are most likely to have home loans and whose loans are the largest.
I also feel for the 15-24 year olds in the chart above, as their earning power is unlikely to be as strong as the 30-somethings.
Speaking of purchasing power, we can break down household debt by income. What we see is that high income earners will bear a good deal of the burden of reducing inflation, as they are the ones who will be hit the hardest by rising interest rates. People with higher incomes are more likely to have housing debt as homeowners and their debts are higher.
However, they are not the only ones to suffer. They may have cash to spare and easily find repayment for their extra mortgage payments. There is plenty left to fill the BMW with premium fuel.
It’s the left side of the graph that will find the next few years – people who may have smaller mortgages but also have less money to pay them off. They are the ones who will be eating house brand beans when their mortgage goes up.
High inflation is bad because it reduces our real purchasing power. The problem is that the remedy works the same way, reducing people’s disposable income by increasing mortgage payments. The few people left after paying their mortgage are now buying less from the supermarket. It could be a painful few years and we have to hope that the RBA will quickly reduce inflation and keep it there.
Jason Murphy is an economist | @jasemurphy. He is the author of the book Incentivology.