NERDS GO TO WAR… But biggest losers will be anyone with a mortgage

Bruce Brammall, The West Australian, 13 February, 2023

Debt Man

“When two nerds go to war, a point is all that they can score.”

With due apologies to Frankie Goes to Hollywood … on this occasion, by nerds, I mean fund managers. And by war, the battleground of Twitter.

Twitter occasionally lures me for a laugh.

If some love couples fighting on reality TV, my funny bone gets tickled by two respected fund managers going hammer and tong on economic predictions and having their blue publicly on social media.

It might not be MAFS, but to economic nerds, it’s equally as funny and awkward.

In this fight, Nerd #1 predicted that with a three percentage point increase in interest rates, the fall in property prices would be single digits. Nerd #2 predicted that with a lesser increase, homes would fall around 20 per cent.

Nerd #1 challenged Nerd #2 to a silly, public, bet. Nerd #2 declined, but hardened his predictions.

Like in the schoolyard, the initial chants were “Fight! Fight! Fight!” But as rates increase and home price data showed price falls were accelerating, reality sets in for the crowd. Virtually nobody wants the Nerd #2 to be right.

(Now Nerd #1, lying prone on the handball court, is madly refining his predictions … downwards.)

Mind games

Even if the property price downturn lands somewhere in the middle, 2023 could be become increasingly tense in households.

Monster rate rises and huge falls in our home values must impact on our confidence.

Some don’t have mortgages. Others’ mortgages are small. But for borrowers, if the cost of servicing a $600,000 loan has gone from $2278 to $3387 a month – there’s $1100 to be found from elsewhere in the household budget.

Even if we accept the first few rate rises were simply taking back “emergency” cash the RBA injected to get us through the Covid crisis, that we should never have taken for granted, there’s still a big chunk of change to be found to balance the monthly finances (with more to come).

Read the message

If you haven’t decyphered the Reserve Bank’s message, the only way out of heaps more rate rises is for inflation to fall.

For individuals, that means stop spending. When too many people buy stuff, prices rise. When fewer people buy stuff, price pressures decrease.

But the real reason to reduce your own household’s spending is … the RBA hasn’t finished yet. There are more rate rises coming in the next few months, with the RBA signalling it will be “paying close attention to … trends in household spending”.

Find where money is leaking from your household budget. It might be extra meals out, subscriptions not being used, your bank needing to be hit up for a better interest rate, switching utility providers.

Screws are on

But there are a couple of other no-to-obvious flow-on impacts from the RBA’s historic increases to interest rates.

Sure, it’s harder to borrow money now than it was a year ago. And it will become increasingly difficult in the next few months.

A year ago, a $600,000 mortgage, at 2.25 per cent, cost you roughly $2300 a month.

Now, at 5.5 per cent, that $2300 can only afford to borrow about $400,000.

If bank interest rates rise to 6.25 per cent, that repayment amount would only cover a loan of $355,000.

Yes, banks build in a “servicing buffer” of 3 per cent, to make sure you could deal with rate rises. But we’ve now gone beyond that 3 per cent buffer, and borrowers looking now have today’s rates, plus another 3 per cent they need to service to meet the bank’s rules.

Second, for similar reasons, many borrowers are going to struggle to refinance. They are stuck with their current lender. (And their lender is stuck with them.)

Then, add in investors, who will also struggle to service new and existing loans. Now those for whom the financial pressure became too much and become forced sellers and … lots of bankers and mortgage brokers will be twiddling their thumbs this year.

Nationally, property prices are down nearly 10 per cent. But the impact of rate rises is cumulative, suggesting the falls are far from over.

Regarding the Nerds and their Twitter stoush … all we have now is hope that Nerd #2 isn’t right. There’s a bloodbath coming if he is. And their fight isn’t as funny as when it started.

Bruce Brammall is the author of Mortgages Made Easy and is both a financial adviser and mortgage broker. E: bruce@brucebrammallfinancial.com.au.