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Is the fixed-rate honeymoon over?

ByAndrew Mirams

Interest rates announcements from the central bank are one of Australia’s most-watched economic indicators. The monthly announcement fuels media reports and analysis for days. It’s a barbecue-stopper topic for homeowners, investors, and aspiring buyers, all keen to dissect each move and figure out what it means for the market and repayments.

Since the RBA set a record-low cash rate of 0.1 per cent in 2020, lenders have been offering a range of low-rate mortgage products to borrowers. The RBA’s goal has been to get some money sloshing around the economy and hoped that low-finance costs for banks would help. It has been somewhat successful as a strategy. Certainly, the housing market has benefited, with demand bouncing back significantly in the post-pandemic period. Last year became memorable for the high numbers of first home buyers eager to get into the market, thanks to a range of incentives set up by the government.

As 2021 has rolled along, fixed-rate products edged lower as they followed the variable rate towards the basement. 

According to the AFR, “There were as many as 32 lenders offering four-year fixed rates below 2.0 per cent at the start of 2021, including Commonwealth Bank, NAB and Westpac”. 

Homeowners have jumped at the early Christmas present, many haunted by stories from parents and grandparents who faced off against mortgage payments in the ‘80s and ‘90s of 18 per cent. 

But, as we know, all good things must come to an end. So, it surprised few, when, in recent weeks, lenders began to lift their four-year fixed rate offerings to above 2.0 per cent. 

“…longer-term rates are moving higher as banks look to manage their margins following a sell-off in the bond market and the end of the Reserve Bank’s funding program,” James Frost wrote in the AFR. 

So, what does the future hold? Have borrowers missed the boat in terms of locking in a fixed-rate loan beginning with a one?

The answer depends on a range of factors, including how the economy fares over coming months, what competitor lenders will do in response to those economic variants… and what the RBA will do – hold, or lift.  

 

Predicting the RBA

The single biggest influencer of mortgage rates is the RBA’s cash rate. Reserve Bank of Australia Governor Philip Lowe has been clear that the RBA cash rate is unlikely to move until 2024 and even then, only when certain economic indicators are met, key among those indicators are an inflation rate between 2.0 and 3.0 per cent, and real wages growth above 3.0 per cent. 

“The evidence from both Australia and overseas strongly suggests that the journey back to sustainably higher rates of wages growth will take time and will require a tight labour market for an extended period,” Mr Lowe told the AFR Business Summit recently. 

As Mr Lowe said, using overseas experiences as a guide, “…it is certainly possible that Australia can achieve and sustain an unemployment rate in the low 4s, although only time will tell. As we progress towards full employment, we will be relying on the wages and prices data to provide a signal as to how close we are,” he said. 

“The current signal is that we are still a long way away from full employment.”

First home buyer New

Economic indicators

Looking at historical labour force data, Australia has only reached the low 4s for one brief period, in 2008. 

So, given the rarity of sustained low-4 unemployment, how likely is it that we will achieve that in the next 12 to 24 months?

Unemployment figures, released in mid-June, have revealed unemployment is down to 5.1 per cent, down almost 1 per cent (0.9 per cent) on the previous month. Another month of similar progress and unemployment figures will begin with a four. Underemployment has also fallen, from 7.8 per cent in April to 7.4 per cent in May. 

On the face of it, this looks promising. However, there is another crucial factor to bear in mind with employment figures – as countries race to become vaccinated the possibility of opening international borders becomes more tangible. If this happens, we are likely to see a return of international workers, who have been the key ingredient helping businesses keep wages growth low. Large quotients of international, low-cost workers have softened demand and eliminated upward pressure on wages.

Looking at CPI, over the 12 months to March 2021 CPI rose 1.1 per cent. This is well short of the target 2.0 to 3.0 per cent and if you exclude Transport from within the overall CPI basket, the result would be much flatter. Transport CPI grew significantly as a result of recovering global oil prices and demand for motor vehicles, which suffered supply chain disruptions, pushing costs up.

 

Fixed rates beginning with a one

For the moment, there are multiple lenders still offering two-year fixed rates beginning with a one. This horizon will take us to mid-2023, where we will have a clearer picture of what the economy looks like and how wages growth and CPI are faring as 2024 looms ahead of us. 

If unemployment continues to bounce around the mid-to-high 5s, the borders reopen, and CPI remains flat, we may see lenders bring their four-year fixed rate products back to starting with a one. 

 

Conclusion

So, these are all the moving parts that go into fixed-rate offerings from lenders. 

Will we reach unemployment levels that begin with a four? Will they remain at that level for longer than 12 months? Will CPI reach targets of two-to-three per cent?

If the answer to all these questions is yes, then we’ll likely see rates rise in early 2024, including fixed-rate offerings.

If the answer is no, Lowe will likely keep rates at 10 basis points. 

 

If you want to discuss this further?

We have all the current lender offerings available to us including the options to lock in the rates as at today.

For the 1st time in a very long time, many of our clients are taking advantage of these low rates with splitting their loans and hedging against rates rising in the future.

If this sounds of interest to you, then please reach out as we’d be only too happy to analyse and advise on your current situation.

 

Discuss your specific needs & formulate the right strategy for you. Get in touch to organise your complimentary 60min session today!

The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs.

Andrew Mirams
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