Brokers fear ‘trouble ahead’ as rate rise expected

It comes off the back of rising inflation, which hit the headline number 5.1 per cent, now at the highest since the introduction of the GST in 2000, as revealed by the Australian Bureau of Statistics.

The rapid rise in inflation has led three of the four big banks to predict the RBA will pull the trigger on the cash rate, ahead of the federal election, while the CBA expects rises to start next month.

While the latest inflation figure is alarming, it is not the figure the RBA watches, instead the central bank makes its move based on the "underlying inflation", which is now at 3.7 per cent, above the preferred 2-3 per cent, which sparked economists to revise their predictions. 

Australian digital lending and payments provider WLTH, has put their bets on a rate rise this month around 0.15 per cent.

National lending manager Chad Hoy Poy said he expects banks will pass on the increased cost of funds to their customers in the form of higher variable rates.

“This may scare some mortgage owners away from variable rates to the predictability of a fixed rate,” Mr Hoy Poy said.

“I believe the variable rate rises won’t be high enough to justify switching to fixed rates that start with a 4.”

While the ABS reported fixed-rate loans were making a smaller percentage of new loan commitments in February, survey platform HashChing found 54 per cent of brokers had reported a “significant increase” in clients locking in rates in 2022.

The report also found broker sentiment “shifted rapidly”, with 51 per cent expecting a weakening of the market, following the rise in inflation reported last week, HashChing’s chief executive Arun Maharaj said.

“Before that, the poll was more in favour of no change,” Mr Maharaj said.

“Our brokers have been a good predictor of the market in the past – particularly when it came to predicting a sustained resurgence in house price growth coming out of the pandemic lockdowns. I’m not sure I’d bet against them now.

“Brokers have clearly indicated that they see trouble ahead.”

The report also signalled refinancing and first home buyer activity had declined, with 36 per cent of brokers surveyed reporting a drop compared to 21 per cent reporting an increase, due to the uncertain environment.

Mr Maharaj said the survey indicated brokers are expecting a quiet period ahead.

“Feast and famine in property has been the nature of the beast for a long time, but brokers can use the quiet periods to shore up lead nurturing processes and diversify their offerings,” Mr Maharaj said.

The primary drivers of the recent inflationary outbreak were pushed mostly by higher dwelling construction costs and automotive fuel, according to consultant economist at Bluestone Home Loans, Dr Andrew Wilson.

Mr Wilson said supply constraints struggled to match demand from COVID stimulus policies, such as the HomeBuilder initiative that resulted in shortages of labour and materials driving a spike in building costs, as well as the impacts of the Ukraine war that raised the price of oil.

Despite the sharp increase in the inflation rate, Mr Wilson said it remains “well below” the previous severe inflationary outbreaks recorded through the 1980s.

“The RBA has indicated that rising inflation in concert with rising wages is a trigger for an increase in official rates – designed to quell demand and cool inflation,” Mr Wilson said.

“The Bank however has seemingly changed its stance recently, indicating that it is now prepared to act sooner rather than later to increase rates.

“That may indicate that its consistently stated precondition for a rate rise – sustained strong wages growth, may no longer apply to its decision-making criteria."

Wages growth behind 

As prices start to rise, workers may demand more wages, and with unemployment at near half-century lows (4 per cent) and businesses struggling to find staff, their demands may be met, economists predict.

Mr Wilson said: “An increase in interest rates without appropriate wage increases will spell bad news for household budgets that are now confronting consecutive quarters of real wage declines approaching record low levels.”

With the ABS March quarter wages index data to be released on 19 May, the industry will be watching with close attention.

AMP’s chief economist Shane Oliver said with inflation “blown out” and full employment reached, it’s only a matter of time before official wages data picks up.

Commenting on the Finder’s RBA cash rate survey, Mr Oliver said delaying wages growth further will risk a rise in inflation expectations making it “harder to get inflation back down”.

Despite many indicators pushing towards a cash rate rise sooner than later, director of national sales at Mortgage Choice, David Zammit, holds steady on a rise in June.

“The economy is strong, with the unemployment rate sitting at a record low and while inflation is rising, it is unlikely the RBA will lift the cash rate right before the Federal Election, so I don’t expect to see a change in May,” Mr Zammit said in comments on Finder.

“However, a compelling case is building for a move in June pending the results of the March quarter CPI and wage price index, which will be released later this month.”

Are borrowers prepared for a cash rate rise?

While the amount the cash rate is expected to increase remains a point of conjecture, a series of cash rate hikes are imminent, which could see many home owners experience mortgage stress.

A rise in the cash rate will increase the cost of borrowing for lending, forcing banks to charge higher interest rates on borrowers’ mortgages.

And according to HashChing’s survey, the majority of brokers (54 per cent) felt their clients may not be prepared for an increase in the interest rate.

While rising interest rates mean people with debt have bigger repayments, it also makes people think twice before borrowing, slowing down the rising inflation, economists predict.

[Related: Fix your rates or risk mortgage stress]