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On the surface, it seems that the house price correction in Australia is already over.

PropTrack’s home value index registered a 0.2 percent increase in February, following January’s 0.1 percent increase.

Home values ​​in the capital rose 0.3 percent in the two months to February, while combined regions rose 0.2 percent, according to PropTrack.

The surprising recovery in home values ​​came despite another 0.25 percent rate hike by the Reserve Bank of Australia (RBA) in early February, pushing the official cash rate (OCR) to 3.35 percent – ​​the highest level since September 2012.

For now, it appears that a lack of real estate listings, record migration abroad and record rent increases have created enough “fear of missing out” to offset the continued rise in mortgage rates.

The house price correction will reassert itself

The house price recovery resembles a classic dead cat bounce, and the house price correction will soon reoccur.

First, the RBA took a more aggressive stance at its monetary policy meeting in February, stating: “The Council expects that further rate hikes will be necessary in the coming months to ensure that inflation returns to target and that this period of high inflation becomes only temporary”.

The RBA also said it was “resolutely committed to bringing inflation back to target and will do whatever it takes to achieve that”.

Therefore, it is almost certain that the RBA will rise again next week, with additional rate hikes very likely in the coming months.

Indeed, Westpac raised its OCR forecast last week to a peak of 4.1 percent as financial markets tipped a 4.25 percent spike in spot prices.

Mortgage lending capacity has already shrunk by a third following the RBA’s 3.25 percent rate hikes. And further increases in the OCR will further reduce borrowing capacity, driving house prices lower.

Fixed rate mortgage cliff approaching

Only part of the RBA’s 3.25 percent of monetary tightening has been felt by mortgage borrowers.

According to estimates by the RBA, about one-third of all home loan borrowers have fixed interest rates, many of which came at rates around 2 percent.

This year, nearly 900,000 borrowers, or 23 percent of Australia’s total mortgage portfolio, will move from low-cost, fixed-rate mortgages that originated during the pandemic to variable-rate mortgages with rates more than double current levels.

KPMG’s economics team recently estimated that a household with a $600,000 mortgage will see an increase in annual repayments of $16,500 when they move from a fixed-rate loan to a floating-rate loan in 2023.

Mortgage rates have already risen above 3 percentage points for many borrowers, which is the minimum maintenance buffer APRA needs to assess someone’s ability to repay their debt.

Therefore, as the RBA continues to rise, borrowers will be pulled deeper under.

Indeed, the RBA’s 2022 stress tests found that if the OCR increased to 3.6 percent, about 15 percent of all borrowers would have negative free cash flow. That is, their income would not cover their mortgage payments and essential living expenses.

This fixed-rate “mortgage abyss” therefore represents a major risk to Australia’s housing market and is very likely to lead to a significant increase in foreclosures, driving home prices lower.

Unemployment is rising

Together with the above forces, the economy is weakening and unemployment is likely to rise significantly in 2023, making it even more difficult for Australians to meet their mortgage payments.

The December quarter national accounts, released this week, were a reality check for Australian households.

GDP per capita – ie after adjusting for population growth (immigration) – was dead flat in the December quarter, following the anemic growth of 0.1 percent in the September quarter.

Even worse, final domestic demand (DFD), which measures domestic activity by removing the impact of net exports, was dead flat in the December quarter, even falling 0.5 percent per capita.

This followed flat (0 percent) DFD growth per capita in the September quarter.

In short, the per capita economy is already teetering on the verge of recession, with the overall economy only saved by strong population growth through record immigration.

The driver of the economic slowdown is household consumption, which grew by just 0.3 percent in the December quarter and fell by 0.2 percent per capita.

Household consumption is the main driver of the Australian economy and where it goes, the economy generally follows.

This slowdown in household consumption came despite a sharp fall in the household savings rate to just 4.5 percent in the December quarter, down from 7.1 percent in the September quarter.

The last time the household saving rate was this low was in September 2017.

With inflation running rampant, the average pay of Australian workers in real terms has plummeted to 2012 levels.

In short, households are turning to their savings to keep up their spending in the face of falling real wages and rising interest payments due to the RBA’s aggressive rate hikes.

Looking ahead, it is clear that household consumption and economic growth will continue to decline in 2023 as the RBA continues to tighten.

This tightening will in turn result in a consumer-led recession for Australian households, at least on a per capita basis.

Unemployment will inevitably rise due to record immigration (labour supply growth) and the slowing economy.

So will defaults and foreclosures, which will drive house prices down.

Because you can’t pay your mortgage if you lose your job.

Leith van Onselen is co-founder of MacroBusiness.com.au and Chief Economist at MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.