PHOTO: Australian property market
The Australian property market has for many years defied the laws of gravity. But is that all about to change?
Analysts are warning a huge surge in US inflation has potential to derail the Australian property market.
The US central bank is expected to respond by raising interest rates sharply and analysts say that will flow through to higher Australian mortgage rates.
The property market is influenced by more than just interest rates, but the fear is that the increase in fixed rates, combined with tighter macro prudential regulation, will knock the wind out of the market. Let’s explore this further.
Has the inflation genie escaped the bottle?
When inflation begins rising, economists often express concerns about the “inflation genie”.
What they mean by that is that once inflation — the general rise in the level of prices for a basket of goods throughout the economy — starts increasing, it’s hard to keep a lid on it.
Right now pandemic-induced supply chain bottlenecks are pushing up the cost of business, and small businesses are passing those costs onto customers.
The US is leading a global inflation rebound, with American annual consumer prices jumping 6.2 per cent in October.
However, unlike in Australia, wages are rising too, giving Americans the ability to demand more at the stores — which puts further upwards pressure on prices.
This suggests the rising inflation we’re seeing in the US currently will remain, and may even become more intense, in coming months.
In other words, as wages rise, shoppers’ purchasing power increases, and there’s further upwards pressure on prices at the stores.
Inflation puts upward pressure on US interest rates
The tonic for rising inflation can be higher interest rates.
Essentially, if you reduce borrowing power and make it harder for those with loan repayments, consumers spend less… theoretically.
US financial commentator Remy Blaire says the Federal Reserve — the US equivalent of Australia’s Reserve Bank — will start raising interest rates in coming months.
“They will have to figure out what to do [in terms of raising rates] given the current inflationary environment,” he says.
Senior ANZ Research economist Adelaide Timbrell believes a US Federal Reserve interest rate hike is imminent.
“The clock is ticking, and with how much [inflation] we’re seeing in the US in particular, it’s not going to be too long before they’re going to have to start tightening their policy and raising interest rates,” she says.
And Australian interest rates will follow
And this is where Australian borrowers’ ears prick up.
Higher US interest rates may translate into higher borrowing costs for Australians. That’s because local banks and financial institutions borrow from US debt markets to finance many of their fixed rate mortgage products. It’s only one source of finance, but it is an important source.
Adelaide Timbrell thinks Australians about to take on fixed rate mortgages will notice higher costs in coming weeks and months, even if the Federal Reserve sits on its hands for months.
That’s because Australian lenders don’t wait for the Federal Reserve to hike rates — they may jump the gun.
“A fixed rate is not just about how cheap borrowing is now, we also see that banks have to hedge their bets on how that price of borrowing is going to change in the next two or three years,” Timbrell says.
“Most banks are now thinking it’s going to be more expensive in two or three years, which means we’re already seeing fixed rates start to go up.”
Borrowers have plenty of wriggle room though, right?
As we know from the latest data delivered in the big banks’ reporting season, many Australians are typically ahead on their mortgage repayments — some by up to two years.
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