Australia Recession Risk Rises as RBA Seen Hiking More Than Fed
Comment of the Day

February 27 2023

Commentary by Eoin Treacy

Australia Recession Risk Rises as RBA Seen Hiking More Than Fed

This article from Bloomberg may be of interest. Here is a section: 

While US mortgage holders tend to borrow over 30-year terms, insulating them from tightening cycles, a majority of Australian borrowers are on variable rate home loans that adjust upwards each time the central bank hikes. 

Australia’s housing market is already in a downturn and higher borrowing costs are likely to drive more declines this year. 

There’s a further risk from re-pricing of loans that were fixed for 2-3 years at record-low rates during the pandemic. RBA data suggest 23% of all outstanding mortgage debt will be re-priced this year and in some cases borrowing costs will more than double to close to 6%. 

While the RBA is relatively sanguine about housing, Eliza Owen, head of research at property consultancy CoreLogic Inc., sees risks on the horizon.

“Australians with fixed-rate loans are about to see a painful adjustment. This is partly the intention of rising rates,” Owen said. “The true test of the market will be over the next 10 months.”

Eoin Treacy's view

Australia, “the lucky country” avoided recessions between the early 1990s and the pandemic because many of the troubles assailing the rest of the world did not impact the domestic market. Moreover the boom of Chinese demand, for just about everything Australia exports, was a major boost to the economy over the last twenty years and insulated Australia from the credit crisis.

By avoiding a housing market meltdown in 2008, and benefitting from a decade of low interest rates, the Australian housing market has surged to previously unimaginable heights. The fact many consumers are very interest rates sensitive poses many of the same issues for the RBA that the Bank of England is contending with.

The hallmark of the Bank of England’s policy has been to talk tough about the threat of recession because they cannot act tough for fear of the impact on the housing market. That’s likely to be mirrored in the RBA’s rhetoric.
The Australian Dollar dropped through the 200-day MA last week and a sustained move back above it will be required to check the slide.
The S&P/ASX 200 continues to unwind the short-term overbought condition, having encountered resistance in the region of the 2021 peak. It will need to find support soon if recovery is to continue to be given the benefit of the doubt. 

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