In case you missed it, the Reserve Bank increased official interest rates again for the 3rd consecutive month as they unwind COVID monetary policy measures and combat inflation.
What does the change mean?
Variable mortgage holders should expect an increase in repayments going forward. In simple terms for every $100,000 you owe, it will cost an extra $42 per month.
Why is the Reserve Bank (RBA) doing this?
While it is a hard pill to swallow – the reality is, they need to in order to combat the highest inflation levels seen in 40 years. By increasing your debt repayments, the Reserve Bank is reducing your disposable income and therefore your propensity to demand goods and services.
What is Inflation?
Inflation is an increase in the level of prices of goods and services that households buy. It is measured as the rate of change of those prices.
Why are we seeing rising inflation levels?
In simple terms there is more money available to demand goods and services but not enough goods and services. The COVID-19 pandemic caused a perfect storm for inflation. Governments worked to inject money supply into the market to avoid a global recession and this was then followed by supply chain shocks around the world, which means the same basket of goods is now more expensive.
What should we expect in the future?
The RBA and other central banks in the USA, EU and UK have started raising official interest rates to combat inflation. According to the Australian Financial Review most economists expect the RBA will reach a peak cash rate of 3-3.5% by mid-2023. This means a discounted variable home loan could carry a rate of around 5% and above.
Are there actions we can take to help manage our higher loan repayments?
What is going to happen to the value of my home or investment property?
Nationally we expect values to decline as they have done for their second consecutive month largely driven by Sydney and Melbourne markets, where borrowers hold larger debt positions and small interest adjustments hold larger consequences. We are also seeing reduced auction clearance rates which are an indicator of demand.
On the West Coast we expect a slightly different outcome. While we should see a slowdown from the post COVID growth we have seen a lower median house price favouring affordability, a strong jobs market, and housing shortage should buoy the market's performance.
For further reading on house values have a look at Core Logic here.