UPDATE 25/07:
Right, so let me make it blunt and short because some of the comments suggest that many did not make it past the title (BTW, I am not in a mortgage pain because I don't have a mortgage and I am also indifferent to rates in real world because I trade with my money not keep it in the bank).
Short version:
- If you bought recently, did not lock the rate for 4-5 years and levered up to "nuts" level - you are probably screwed
- If you bought multiple properties within the last 1 year on leverage - you are screwed
- If you will need to sell within the next 2-3 years - you are f@cked
- Even RBA now confirmed this view - read between the lines, the link is at the bottom of the message
Why:
- There was NO real price discovery in the housing market in the last 2 years (I would argue, since 2008) - the price was a function of liquidity. Liquidity has now been drained out and we will only see a reduction of liquidity from now on and until something major breaks (i.e., massive credit event)
- RBA would know when to stop tightening AFTER the fact they broke enough things (including the housing market), because of their model and data driven process based on the lagging indicators (described below)
- Inflation will be sticky and will not go down easily unless we have a proper recession which will further tighten available liquidity (not only because the rates will go up but also because people will have much less disposable income after paying down for all necessities)
- If rates will go up to (let's say) 20102-12 levels and liquidity will go down, then it would be no surprise to see the house prices back at the 2010-2012 level. Where do you think all that bidding up would come from if rates are high and available money is low?
The end.
The markets are slow after yesterday’s moves and while I watch the paint dry tape, I decided to annoy you with another post of “many words”.
I told you about 1970s-style inflation coming many months ago – most just shrugged it off saying that they’d be just fine. Now we have every third post about cost of living and rising mortgage repayments. Some (50+ people, really?) even want to sue RBA claiming that they would not have got their multi-million mortgages when the rates were low if only <insert the condition> … or would they?
Do we need to blame RBA policies for our decision?
RBA (and FED) live in the world of averages, forward guidance, and credibility. They maintain their policies in line with a “control theory” that “works with a long and variable lag”. What would all that mean in the real world?
- Average is the most dangerous word in finance, right? Well, not if you are a Reserve bank. RBA will not run to raise rates if, i.e. oil hits $120 for the first time in years. They will do absolutely nothing if inflation spikes for one or two months (FED made it fashionable with their “average inflation targeting”). They will need the deviation to stay high enough for long enough to distort their averages in order to action because of the ….
- Forward guidance. In other words – take it slow and easy, like dating a beauty queen (especially in the light of the new Consent laws). Announce what you going to do next, then wait for a reaction, then announce a bit more and wait a bit more. If she doesn’t react – take another baby step… after announcing… and waiting. You move slow but extremely steady and with an absolute resolve because you must maintain your…
- Credibility. The markets know that RBA have got tools in their toolbox to maintain calm and order when it is required. And credibility is the one thing they don’t have anymore, and desperately trying to get their credibility mojo back.
Usually, the disbalances in the market work themselves out because participants know that FED (RBA) will make sure that deviations from averages will not last long enough because of their credibility (and the toolbox). In most cases, just a few words of that proverbial forward guidance is enough to discipline the market. But not now. Why is that?
Because we found out that while RBA (FED) have got their tools all right, they don’t have the guts to use those tools. Both institutions have chickened out when it was time to raise rates and preferred to air on the side of “inflation is transitory” based on reading of their averages against the base-effect from pandemic.
Now, in the “average” world there would have been some reasoning behind “transitory” argument, but we don’t live in the average world and there was not much common sense to wait for raising rates after seeing all that stimulus money working its way though pandemic-weak supply chains.
Lets, however, be honest and admit that even if RBA were to hike rates early enough, inflation genie would still be out of the bottle with hundreds of billions thrown on the bon-fire by federals and states alike (Fiscal is always inflationary). It was not the war or evil Putin, or supply chains - no. It was free money, near zero rates but, most importantly, our animal spirits that are to blame for this inflation.
What’s next?
Now RBA will overshoot in another direction and overtighten.
Remember that messed-up “Credibility”? They said that they will kill this inflation and you’d better trust them because credibility needs to be restored, even if it is done through blood and tears of most recent entrants into the property market. Not my words - https://www.afr.com/policy/economy/recent-home-buyers-most-v…
Make no mistake – RBA will need to kill demand to kill inflation. Exactly in that order.
Remember that “long and variable lag” from the top of the page? It means that when the policy is tightening, the first one to fall is growth and demand. The lag to kill growth is much smaller than a lag that is required to kill inflation. And the policy will need keep tightening for a long after demand is down and begging for mercy. After all, inflation is affecting everyone of us while only 10% are vulnerable to higher rates due to over-commitment on mortgages – again, not my words.
I told you some time ago that it might be wise to re-allocate and get out of the real estate market especially if you are leveraged to the eyeballs – I hope you listened.
Let's do some voting, shall we?
Q when the Mortgage Pain will Stop?
A when we die….. living is suffering…