AAA Finance Economic Forecast for 2023

Peter Watman, Owner and Director of AAA Finance and Insurance, shares his economic forecast for 2023. Peter has a Bachelor of Business majoring in Economics and International Business from QUT.  He has a keen interest in economics and stays up to date with the latest economic and political news.  In this article Peter shares his thoughts on interest rates, house prices and inflation. He also explains the potential negative impacts of redrawing on a mortgage to pay for assets versus having a separate loan for a new car or caravan purchase.

The RBA is meeting today, Tuesday 6th December 2022, and will be making a call on whether to raise interest rates or keep them on hold.  Peter believes that the RBA has not finished with its tightening cycle and will increase interest rates by another 0.25%. Especially as they are not meeting in the month of January.  One more small increase and then the RBA will sit for 60 days and will examine the impact of their 8 consecutive rate rises. 

There is no Christmas present from the RBA! 

A 0.25% increase will add approximately $75 per month to the repayments on a $500,000 mortgage. The RBA would like consumers to be cautious in their Christmas spending, however Peter doesn’t think that this will happen.  He believes that there is an awful lot of money that has been saved over the last few years with record low interest rates at 0.1%, limited international travel and extensive government support during Covid lockdowns. Peter predicts that there could be a record in Christmas spending before people start to curb their spending habits.

But what about next year?  Will rates continue to rise? 

Peter is a bit line ball on this one. The RBA doesn’t meet in January and in February he thinks there may be one more 0.25% rate rise. After February Peter thinks the RBA will pause for a period of time. Why? Because a fair bit of the heavy lifting is going to be done by the rollover of fixed rate mortgages into variable contracts over the next 12 months.

Approximately 67% of fixed rate mortgages will be coming to an end in the 2023 calendar year.  Individuals will be moving from a fixed rate that was set a year to two ago at 1.8% and go straight into a variable rate in the 5% plus mark.  If you have a $750,000 mortgage your repayments will increase by $1200 a month or $14,000 over the next year. This is going to hit people in their back pocket. The RBA needs to allow time for this to impact consumer spending and assess the latest data before moving rates again.

What will happen to House Prices? 

Sydney, Melbourne and even Queensland have seen a drop in property prices - Queensland by 7%, Sydney 10-12% and Melbourne is in a similar situation. At this stage if the RBA doesn’t increase interest rates more than 1 or 2 more times, Peter thinks housing prices will stabilise and will start to appreciate again in mid to late 2023. 

Australia has opened its international borders and increased our immigration.  We have over 250,000 people coming into the country next year and they all need to live somewhere.  We already have a very tight construction sector where there is insufficient housing being built.  Until supply increases, house prices have a ‘floor’ which they will not fall under. Peter is quite positive that it is not a bad time to purchase property.  He thinks that over the next 2 years there will be decent appreciation and over the next 10 years quite significant property price increases.

Mortgage Redraw vs Car Loan

Everyone has so much more equity in their property due to recent property price increases.  Even though AAA Finance can get very competitive asset finance rates for our clients, mortgage rates will always be lower due to the huge difference in the loan amounts. Say $75,000 for a new car versus $750 000 for a home.  Some people think it’s a good idea to use this equity to purchase a new car or caravan at cheaper home loan rates.  But there are some major flaws to this idea.

Firstly, equity is not free money.  The most valuable asset you will own in your life is your home. To build wealth and retire well you need to pay this off as quickly as possible. Your home loan balance needs to be decreasing NOT increasing.  A new car or caravan has a limited lifetime.  You may only keep them for 5 to 10 years.  Do you want to be paying for your ‘new’ car 20 years from now?

Secondly you will end up paying a LOT more for your new car. When you redraw on your mortgage you are effectively going to be paying if off over the life of the mortgage, which could be anywhere from 20 to 25 years. On a $50,000 car you could end up paying nearly $40,000 in interest over 20 years! You end up paying 3 to 4 times more interest than you would if you had got a separate car loan.

There is way to take advantage of lower mortgage interest rates, but it is only for those who can stick to a plan.  And yes, we all think we can, but in reality, so many of us don’t. You will need to work out the cost of the new car over a 5 or 7 year period based on your current rate and actually increase your home loan repayments to match.  As rates increase you will need to bump up these repayments. 

Lastly most asset finance lenders offer a fixed interest rate for the life of the loan.  If you got a car or caravan loan through AAA Finance 7 months ago your interest rate and repayment will not have changed, even though the RBA has made 8 rate increases since.  Having a car loan is easy to budget for as you know exactly what your repayments will be.   

Forecast for Inflation 

The cost of literally everything has gone up - from groceries to cars to electricity.  Peter thinks that inflation is starting to level out.  A lot of the data is showing that the supply constraints that we have experienced over the last 2 years are starting to free up.  Shipping went from $2,000 a container to $10,000.  It is now back down to $4,000.  This is a significant drop.  There are still some constraints with regards to the manufacture of microchips.  One of the largest impacts for the chip sector was Covid.  A lot depends on China and whether they continue with the Covid zero policy.  Peter thinks this will start to loosen due to civil unrest in China during the last 30 to 60 days. 

Energy prices have increased due to the war in Ukraine with Russia cutting of gas and energy supply to a lot of Europe. This means the demand for Australia coal and gas in at an all-time high.  This is putting a lot of upward pressure on energy prices.  The government claims they are going to cap coal and gas prices.  Whether they will be able to achieve this is a bit of an unknown.  They may have some luck with gas, but with coal he is unsure. NSW and Queensland need to agree, and they won’t unless the federal government heavily compensates these States for lost income. These losses have the potential to be in the billion dollar range!

Overall, the Economic Forecast for 2023 is Positive

Even though growth may moderate a little, it will remain positive. Interest rates rises are slowing and will most likely plateau in 2023. House prices have stagnated but will again increase as they always do. Inflation will cool as the covid affected supply chains recover. Let hope Peters economic forecast is correct and we all have a happy and prosperous 2023!