Homeowners will face mortgage rates close to 5.5% in just over a year, according to a survey of 22 leading Australian economists.
The Conversation’s 2022-2023 forecast survey predicts an increase in the Reserve Bank’s cash rate from its current level of 0.85% to a peak of 3.1% by next August.
If fully passed on, the series of rate hikes would increase the cost of payments on a $500,000 variable mortgage by about $600 per month and the cost of payments on an $800,000 mortgage by about $1. $000 per month.
House prices in Sydney and Melbourne would fall by 6-7%.
The panel believes the Reserve Bank will push its cash rate to its highest level since the 2010-2012 resource boom in a bid to contain inflation, which is expected to drop from its current level of 5.1% to a peak of 7.1% before the end. of the year.
Panelists rate the risk of an overreaction by the authorities causing a recession at a 40% chance in the United States and a lower 20% chance in Australia.
Now in its fourth year, The Conversation’s survey draws on the expertise of leading forecasters from 20 Australian universities and financial institutions, including economic modellers, former Treasury, International Monetary Fund and Reserve Bank, and a former member of the Reserve Bank Board of Directors.
The panel expects the next inflation figure to be released later this month to show prices rose 6.7% in the year to June – the most since the start of the 1990s.
Panelist Saul Eslake says it’s hard to be sure when inflation will peak without knowing when and how Ukraine’s conflict will end, although he says it’s hard to see the prices of energy to climb higher, and there is evidence of COVID-related supply disruptions starting to subside.
Overall, the panel expects inflation to peak at 7.1% towards the end of this year before falling next year.
Interest rates are rising
The panel expects the equivalent of five 0.25 point interest rate increases from the Reserve Bank over the next six months, and just ahead of two more 0.25 point increases over the next six months following.
Overall, the panel expects the cash rate to stop rising when it hits 3.1% next August, but some members expect much larger increases.
Warwick Mckibbin, a former Reserve Bank board member, expects a cash rate of 4.5% (implying mortgage rates of 6.75%) by March, and he says that c is less than necessary.
He says the cash rate needs to climb above the 3.5% that would normally be considered neutral, and stay there for an extended period to bring inflation back to the Reserve Bank’s target.
Former Commonwealth Treasury and financial markets economist Warren Hogan sees rates rising for five years, although his forecast is four years out.
Su-Lin Ong, head of economics at RBC Capital Markets, believes this won’t be necessary to cool the economy as the expiration of ultra-cheap three-year fixed rate mortgages taken out during COVID will lead to a “market-induced tightening”.
Risk of recession in the United States and Australia
The panel believes the United States is at much greater risk than Australia of a miscalculation in which rates are pushed so high to contain inflation that they cause a recession.
The US economy has already slowed in the first three months of this year, and the panel expects it to end the year just 2.2% higher than at the start of the year. The panel expects unusually weak economic growth of 2.6% in China.
In the United States, the task of defining the beginning and end of recessions is entrusted to the business cycle dating committee of the National Bureau of Economic Research.
The panel estimates there is a 40% chance it will call a recession over the next two years, with the most likely start being March 2023.
The panel assigns a 20% lower probability of a recession in Australia (generally defined as two consecutive quarters of negative economic growth) and estimates the most likely start date to be August 2023.
Barring a recession, the panel expects economic growth to decline in line with the March budget forecast, falling from 4.25% year-on-year in 2021-22 to 2.5% over the next five years.
Quality of life
The substantial increase in wage growth predicted by the panel, from 2.4% in March to 3.6% by June next year, will be far from enough to keep real wages from falling.
Even if inflation fell to 4.8% by then, as expected, real wages would still fall by 1.2%.
The weight of further wage growth increases will be an expected boost in unemployment, from 3.9 percent to 4.2 percent.
ANZ chief economist Richard Yetsenga said while reopening Australia to skilled migrants, temporary visa holders, students and backpackers will add to the supply of workers, it should also boost already very strong consumer spending, limiting any increase in unemployment.
The panel expects outsized real growth in household spending of 4.5% in 2022-23, spurred by what Barrenjoey Capital’s chief economist, Jo Masters, describes as high household savings, combined with the continuation of fixed rate mortgages and tax offset payments for low and middle incomes due to hit accounts starting in July.
The broadest measure of living standards, real net disposable income per capita, is expected to continue to grow, albeit modestly.
The panel expects house price declines driven by mortgage rates to reach 6-7% in Sydney and Melbourne over the coming year.
Julie Toth of Swinburne University and We Group expects the impact to be greatest in low- and middle-income suburbs, where buyers are more vulnerable to mortgage increases.
Still, the panel expects solid non-mining business investment growth of 6.4% (and mining investment of 7.6%), and an iron ore price above US$100 an ounce, but down from its current level of US$130 to US$108.
He expects the Australian equity market to end the year down 2%.
After a year in which the 10-year bond rate that determines the government’s cost of borrowing rose from 1.5% to 3.7%, panelists expect only a slight further increase in 2022-23, at 3.9%.
After slipping from 75 cents US to 69 cents US, they expect the Australian dollar to rise slightly to 72 cents in 2022-23, putting downward pressure on inflation.
Peter Martin is a visiting scholar at the Crawford School of Public Policy at the Australian National University. This article originally appeared on The Conversation.