Global oil shock has far-reaching implications for Aussie brokers
US president Donald Trump is threatening to ramp up attacks on Iranian energy infrastructure (while simultaneously implying that he wants to wind the war down).
Tehran has responded in kind by threatening to blow up energy facilities across the Middle East, with the UAE, Qatar, Bahrain and Kuwait in the crosshairs.
The Strait of Hormuz remains in lockdown, throttling a fifth of global oil flows, as US allies including Australia ignore Trump’s call to arms to liberate the strait from Iran’s blockade.
Amid an escalating energy crisis, with some petrol stations across Australia already running dry, fuel prices have soared to record highs.
At the time of writing, Unleaded 91 was selling for 238.4 cents per litre on average. In some regions, prices have soared past the three-dollar mark.
In a move unlikely to quell the public’s anxieties, the International Energy Agency is encouraging people to work from home, car share and cancel flight travel plans to ease the burden.
If nothing else, the past few weeks have driven home how oil is the liquid bedrock of modern commerce, and how supply shocks have the power to reverberate through all corners of the financial markets.
Aussie bonds battered
Take Australian bonds, which took a battering when markets opened on Monday.
Three-year government bond yields (which are inversely correlated to price) soared to 4.89% at the time of writing – levels not seen in 15 years.
Bond traders are offloaded their holdings for cheap on the market because they expect higher coupon rates down the line. In other words, the market is pricing in higher central bank interest rates.
Having increased the cash rate by 50 basis points in the past two months, markets are dead sure that the Reserve Bank of Australia (RBA) has more up its sleeves. A May hike is almost bolted on, with at least two more subsequent hikes priced in by the end of the year.
Westpac analysts believe markets have now priced in a terminal RBA cash rate of 4.85%, implying that three more hikes are in store.
Depending on the course of the Iran conflict, the markets could pivot in the weeks and months to follow, but as it stands, mortgaged households should brace for higher monthly repayments.
The road to 7% mortgages
The major banks have passed through both of this year’s RBA rate hikes with Gusto, bringing variable rates on the simplest of home loan products closer and closer to the 6% mark.
Benchmark home lender Commonwealth Bank’s standard variable interest rate currently sits at 5.84% – from the next pass through date on 27 March, it will increase to 6.09%. This January, the average owner-occupier variable housing rate was just 5.5%.
If current market trajectories prove accurate, standard variable rates could push closer to the 7% territory by the time 2027 rolls around.
Households – particularly those on low-deposit loans – will see their serviceability buffers tested to their limits as the higher prices hit their bank accounts.
The RBA reckons Australian households are capable of shouldering higher mortgage repayments, at least to the extent that defaults shouldn’t lead to system weaknesses.
“While this environment will be challenging for some households and businesses, the strong financial position of most borrowers is likely to limit the risk of widespread financial stress in response to higher inflation and interest rates, or if a significant economic downturn were to occur,” said the RBA.
But with monthly mortgage repayments expected to soar, serviceability constraints are going to severely limit new deal flow.
Mortgage broker Katrina Rowlands expects a broad slowdown across purchases and refinancing in the months ahead as consumer confidence takes a nosedive, regardless of the direction of the Middle East conflict.
“Even when things come back to right or improve, or are on the upward swing, the return to confidence is much, much slower,” said Rowlands. “I think it will be a six-month recovery, no matter what.”
Rowlands is seeing the mood change around her, with fewer people on the roads, the airports less busy than usual and people putting off large financial decisions.
“No one's going to buy, no one's going to sell, no one's going to renovate,” she warned, although debt consolidation could be in demand. “I think it's going to be a phenomenal time to take a break from the industry.”
Nonetheless, things remain “super busy” for Rowlands’ brokerage Mortgage Success for now, as homebuyers seek to lock in settlements before the four-day Easter break.
But what happens next is anyone’s guess.
