One of Australia’s leading economist has told a banking conference investors are effectively betting people’s lives are about to be ‘‘hell”.

The Australian Financial Review Banking Summit heard Deloitte partner Chris Richardson suggest market investors were predicting interest rates rising above 3 per cent in coming years.

‘‘ If that happens, most models would suggest you’d lose 15 per cent to 20 per cent out of housing prices in Australia – there goes $2 trillion,’’ he said. ‘‘ Markets are saying your life is about to be hell.’’

Mr Richardson is not alone. There are already signs of trouble ahead.

New Treasurer Dr Jim Chalmers cited petrol prices up 12 per cent since the end of April; wholesale electricity prices up 237 per cent and domestic prices set to rocket, as well as gas prices up more than 300 per cent over recent years.

“The situation we’ve inherited is serious. In some instances, it is dire,” he said.

The Australian Prudential Regulation Authority (APRA) says it has targeted some banks for lending to home loan customers that carry too much debt. 

In October, the regulator warned banks to rein in lending to highly indebted customers or those with a debt-to-ratio of more than six times. 

APRA chairman Wayne Byres told the same conference the economy was entering “a very different environment than has existed for much of the past decade”.

“The faster-than-expected emergence of higher inflation and interest rates will have a significant impact on many mortgage borrowers, with pockets of stress likely, particularly if interest rates rise quickly and, as expected, housing prices fall,” Mr Byres said. 

APRA is monitoring the impact of “sizable repayment shock, possibly compounded by negative equity” when fixed rate borrowers roll-off to higher variable loans”. 

Refinancing at a record high 

The increasing rates are now driving borrowers to hunt better deals with refinancing on track to smash last year’s record. 

According to data compiled by CoreLogic the level of refinancing has resumed its upward trajectory, which is in stark contrast to the 5% to 8% correction in property prices unfolding in select inner-city suburbs in Sydney and Melbourne. 

The upward trend is expected to continue as more rate increases are expected. 

In 2018, digital property settlement firm PEXA launched its refinance index, which peakest last December at 206 and now shows 177.8 for the week ending May 22, which is up 22.4 points year-on-year. 

The index only includes external refinancings where the borrower switches lenders, and December is typically a strong month before people go on their Christmas holidays. 

According to Mike Gill, PEXA head of research, the current trajectory will continue and even accelerate. 

Mr Gill believes that borrowers would continue to respond to the May rate hike, with the full impact expected in June as new deals struck with different lenders were bedded down. 

Mortgage wars heating up 

Strangely, banks are lending and even dropping their rates. 

Commonwealth Bank launched Unloan, an online loan for homeowners who are looking to refinance their properties worth at least $3 million. It has a maximum loan-to-valuation ratio of 80% and encopasses a low-interest rate of 2.14% and loyalty discount of 0.01% a year for up to 30 years. 

Just days after the CBA launch, ANZ bank announced its lower standard variable rate on simple home loan products to entice new customers. 

While Westpac increased its rates by 25 basis points for most of its offerings, it reintroduced a “honeymoon” period of two years for its lowest variable rate of 2.09% that increases by 0.40 percentage point after the first two years. 

Sally Tindall, RatesCity director said the moves reveal the level of competition that still exists in the market. 

‘‘Competition in the mortgage market is still alive and kicking, despite the RBA hikes,’’ she said. ‘‘While most variable customers will now be dealing with higher repayments , some banks eager for new business are handing out exemptions.’’

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