Get ready for a big hike in interest rates in June

After spending my entire working career trying to make economics and investing interesting enough, to encourage otherwise distracted normal people to take heed of important hip-pocket warnings, I know many Aussie mortgage holders are in for a huge wake-up call next Tuesday.

Yep, the word on the street — the economists’ street — is that we should expect a 0.4% or 0.5% rise in the cash rate and that will be a huge kick in the pants for those over-borrowed. And aside from the extra dough, all borrowers will have to shell out to lenders, it’s made worse when news headlines tell us that home prices are starting to fall.

Hot off the data read from the PropTrack Home Price Index, the story is that “Australian home prices fell for the first time since the start of the pandemic, dropping -0.11% in May, as homeowners saw their first interest rate rise in more than a decade.” Sydney saw a 0.29% decline while Melbourne lost 0.27% but it’s early days and rate rises will take a lot of froth out of a very excessively, bubbled housing market.

Here are the key findings from the report:

  • Home prices fell nationally in May, down -0.11% month-on-month (MoM), marking the first fall since the start of the pandemic.
  • Annual price growth has fallen from 24% only six months ago to 14% now.
  • Sydney saw prices fall in May for the second consecutive month, down -0.29%, with Melbourne (-0.27%), the ACT (-0.12%) and Hobart (-0.05%) also seeing a continuation of slowing growth.
  • The strongest performing cities in May were Adelaide (0.58%), Brisbane (0.35%), Perth (0.19%) and Darwin (0.05%). All other capitals saw declines.
  • A two-speed housing market is continuing, with regional areas, as well as more affordable capitals of Brisbane and Adelaide, seeing continued growth in 2022 compared to the slowing conditions being experienced in the rest of the country.


Regional Tasmania (0.47%), regional SA (0.34%), regional NT (0.20%) and regional NSW (0.24%) were the strongest performing regional areas in May.

In case you’ve forgotten, the RBA cash rate went down to 0.1% because of the Coronavirus lockdowns. After the May rise, it’s now 0.35%, but by next Tuesday it looks like it could be 0.75% or higher. It’s possible Dr Phil Lowe and his Board could play it safe and only increase by 0.25%, but I suspect he’d be hearing from his expert colleagues that one big one might be a cut in time, so to speak, that could save nine!

And there are some madmen and women out there in economist positions saying nine rises of 0.25% each are possible!

I must admit, I wonder what these people have been smoking?

The CBA economics team see a cash rate of 1.35% by year’s end and so does Paul Bloxham, the chief economist of HSBC locally, who I interviewed on my Monday Switzer Investing TV program. You can see it here:

I think 1.35% is much more likely than 2% or 3%!

So, how hard will a 0.5% rate rise hit household budgets? The rule of thumb is when rates rise by 0.25 percentage points, repayments on a principal and interest loan of $500,000 go up by about $70 a month.

If the rise next week is 0.5% the loss of money for borrower’s income will be $140 a month but if the loan is $1 million, then they will have to learn to live without $280 a month!

And if Paul Bloxham and the CBA are right, by Christmas the total rise in rates will be 1.25% from May and that means borrowers on a $500,000 loan will be paying $350 more a month or $4,200 a year to own a home than they did before May!

If the loan is $1 million, we’re talking $700 a month or $8,400 a year!

That’s going to seriously hit consumer confidence, cut back spending and really slow down economic growth and that’s why the RBA might be thinking about a “stitch in time — a 0.5% rise — might save nine” and a serious economic slowdown, which could roll into a recession.

This is an enormous test of the credibility of the respected RBA Governor, Dr Phil Lowe, who would love to be remembered as the guy who slayed the inflation dragon, while not burning too many Aussie’s home-owning dreams.

He also wouldn’t want a home price collapse — a fall? Yes but not a crash.

And all of this is very timely as we get the March quarter economic growth numbers today and these, along with other readings on the economy will help the RBA work out what inflation could do in the coming months and then what it should raise rates by over the rest of 2022.

Inflation here is 5.1% and miles lower than the US at 8.1%, and we learnt the Eurozone also saw inflation of 8.1%, which is the highest ever since the Eurozone was created in 1999!

All of this is worrying but remember much of it came out of the economic rescue program from the threat of the pandemic. Low interest rates and big budget deficits, thanks to JobKeeper, saved us from a Great Depression, where Treasury said unemployment could’ve gone to 15% — that would’ve been 1.8 million people out of a workforce of 12 million without work.

That would’ve been a misery a lot worse than the rising interest rates we will see this year and next.

And by the way, only a third of adult Aussies have home loans and many of them borrowed years ago at much higher rates, so they’ve enjoyed two years of big rate cuts they never expected. The COVID experience has been socially hard but if you were an employee who kept a job and now work from home for a few days a week, and your home loan repayments have fallen, while the value of your home has risen, the pandemic has been very positive, economically-speaking.

Of course, if you are a small business owner you might not be as happy with the past two years!

By the way, there are a lot of retirees and savers out there who are happy that rates are rising with Macquarie’s one-year term deposit now at 2.75%, which is a big jump on the sub-1% rates we saw in 2020.

Source: Peter Switzer – 1st June 2022