Will interest rates rise in 2022? is a question that seems to be on everyone’s mind at the moment. Interest rates have been at record lows for so many years resulting in tremendous (but unsustainable) property growth. According to everything I have been reading all signs are pointing to a big resounding: YES. Interest rates are on the up and this year is the year to start the upward trend. The upward movement might be incremental but it seems like it’s most certainly on the cards.
Now I am no banker but even as a layperson it seems inevitable. The low-interest rates have allowed normal aussie workers to be saddled with a 700K mortgage for a shitbox house…I mean that is insane. The price growth in property has established wealth for the Boomers & Gen X that will never be replicated by millennial’s or Gen Z who are yet to get into the market. Until they inherit it, that is. I will demonstrate what I mean. My parents at the age of 25, with low income wages, bought a block of land and built a beautiful 4 bedroom house in the year 2000 for $140K. Exactly 20 years later it sold for 550K. Let’s just keep things simple and not account for any added renovation costs etc it tripled in price over a 20-year time frame. Of course, 20 years is a long time for an asset to grow but how much further can it really increase?
Now if a young person wanted to purchase that exact same house that my parents had, it would cost them $550K. You can’t possibly tell me that in 20 years they will be selling that house for 1.5 million in a regional town? Absolutely not. It might increase a bit but it seems like the era of making serious capital gains from a property is sadly over. These days you buy a house because umm I don’t know, you need somewhere to live? Boomers will bang on about interest rates being higher back in their day but it’s really no comparison. Buying a house in the year 2000 was way easier than in 2022 and if you bought one or two or ten as many boomers did, it is likely to have made you a hell of a lot of money as you rode the property wave.
Now back to interest rates. The banks have been increasing their fixed rates slowly but surely for the past few months. The rising rates have already started. You can no longer get a fixed loan from one of the big banks that is lower than 2%. According to Sydney Morning Herald ‘ANZ expects the first hike in the first half of 2023, Westpac tips February 2023, NAB says mid-2023, while both CBA and AMP Capital predict November 2022.’ There has been a rise in the number of people fixing their home loans as they know the end of the low rates is near.
There is a bit of contention on when the reserve bank will possibly raise its rates. But they are cautious about anything that could throw off economic recovery. They want to see an ‘improvement in wage growth and inflation first’ I tend to think that in Australia there are so many households with huge mortgages and so many people who have their wealth tied to their house that it would be impossible for a solid correction to happen. The government always caters to the masses, not the poor first home buyers who get always get the short end of the stick. Even if the rates do incrementally rise over the next few years I highly doubt we will ever see the days of 10% interest rates again. However, if we did that’s when we would really see people lose their shirts and a property market price crash.
People who are normal hard-working aussies have had the choice between taking on a huge loan in order to get their own house or to continue renting. Not necessarily the greatest of two options. The third option of course is living with mum forever and let’s face it, no one is really too keen on that.
What will happen if interest rates rise
The short answer is…probably nothing. People will go about their lives working hard to pay their mortgage repayments each month. A slight increase will probably not be too difficult for people to manage. Especially considering the bank ‘should’ have factored that in when deciding how much they can afford to borrow.
We have heard over and over again that “The banks are only lending out what you can afford to pay back” I understand that this is kind of true but in reality the banks rarely lose. Have a small deposit? No problem pay 10K Lenders mortgage insurance to insure the bank against yourself for defaulting on your own loan. Or maybe the bank will just get your mum & dad to sign as guarantors? Meaning if you default on your mortgage they will take your house back as well as have the ability to take your parent’s house to make up the shortfall. The point is, the bank rarely loses money. They have these things in place to ensure that if you can not afford your repayments for whatever reason, they have options. If they were in the business of losing money all the time then none of us would trust them with ours. The banks have loved the past 10 years of chaining Aussies up with huge mortgages at low-interest rates because they know it is extremely unlikely for people to pay out their loans quickly if they borrow 700K. Ka-ching more money for them with more interest payments lining their pockets.
For me personally, I have been discussing the plan and scenario’s with my partner about what we should do if and when interest rates rise. Being forewarned about what a 0.5% or 1% even 2% rate increase looks like to your family budget is important. Luckily for us, my partner’s property is a unit so the loan is serviceable even with an increase. However, no one wants to have to pay more interest to the bank. We will be loading up the savings in the offset account in order to try and reduce the interest we are paying when the time comes for our fixed loan to expire.
The next 12-24 months will be very interesting in the world of property prices. With the borders reopening shortly one can assume that demand for property will increase as internationals make their way back down under. However, if the market is to be believed and there really are multiple rate increases this year then maybe the prices will flat line. In my opinion, a large correction is doubtful but hopefully, a cooling market will at least allow young people to get a look in.
