The collapse of Silicon Valley Bank in the US could spell good news for Australian mortgage holders, with one expert saying the RBA could pause interest rates as a result.
Two Red Shoes Mortgage Broker and former real estate agent Brett Sutton said the RBA Rate Indicator, which shows market expectations of a change in the Official Cash Rate, currently sits at 75 per cent chance of there being no rate rise in April.
But he said immediately after SVB collapsed the indicator hit 100 per cent.
Silicon Valley Bank officially collapsed on March 10 amid a sudden bank run and capital crisis, spurring US federal regulators to take over the financial institution.
Mr Sutton said when the bank collapsed it dramatically altered the bonds market, which is one thing the RBA analyses when deciding its monetary policy.
“The bond market we look at is the three-year and the 10-year bond market,” he said.
“And the yields on those have dropped dramatically because they became more in demand as a safer investment option.
“When there’s any uncertainty out there people go for safety and therefore the price of bonds go up, yields go down and that’s typically been an indicator in the past of what the Reserve Bank will use to set their policies going forward.”
Mr Sutton said a couple of weeks ago there was a 50-50 chance the RBA would leave rates on hold, but that jumped to 100 per cent immediately after SVB collapsed.
He said that had now fallen to a 75 per cent chance, but that was still a solid position.
“The other factor that I think is at play here is, part of inflation has to do with imports and exports and the cost of doing those,” Mr Sutton explained.
“Part of it is trying to keep parity, or a consistent exchange rate. Now, if the US Reserve Bank increases their rates, it puts downward pressure on our dollar and the exchange rate.
“So, in the US right now, they’ve actually built in about a one per cent decrease before the end of the year, into what they’re factoring in over there.”
Mr Sutton said this could mean the terminal Australian cash rate ends up being lower than the 4.1 per cent most experts have predicted.
“That’s now come back to about 3.9 per cent,” he said.
“So there’s possibly maybe one, one-and-a-bit rate rises and we’re there.”
Mr Sutton said the latest unemployment figures, with a 0.2 per cent drop to 3.5 per cent on the seasonally adjusted rate, was likely behind the RBA rate indicator fall.
Among his clients, Mr Sutton said there was some caution and disappointment, with house hunters experiencing about a 25 per cent reduction in their borrowing capacity as a result of 10 consecutive interest rate rises.
“People aren’t able to borrow as much as they were 18 months ago, but they’re not seeing the property market go down at the same rate,” he said.
“The average we’re probably seeing is about a 25 per cent reduction in their borrowing capacity, and the average across the country is a reduction in the property market of 10 per cent.”
Mr Sutton said there had been a significant lift in mortgage holders refinancing to get a better deal, but the rate of “mortgage prisoners” had also risen.
“Because rates have increased and the market has come back, we’re seeing a higher percentage of people who are what we refer to as mortgage prisoners,” he noted.
“They no longer qualify for the loan that they currently have, which means they can’t necessarily refinance, so they’re trapped with that lender.”
However, Mr Sutton said he had not witnessed any fire sales or recently buyers having to quickly exit the market.
But he said stock levels were low and one thing that could be impacting this was upsizers no longer being able to afford to upsize, which meant there were fewer properties available in the lower or first-home buyer end of the market.
“But we’re not seeing people coming onto the market that have to get out,” he said.
“We’re not seeing the defaults on their home loans at this point in time.
“The great Australian dream is to own your own home so people make cuts in other areas to try and retain it.”