US mortgage costs shot up at the fastest rate since 1987 this week, with the 30-year rate hitting an average of 5.78 per cent on Thursday.
This comes on the back of the US Federal Reserve’s decision to increase rates by a further 75 basis points on Wednesday, taking the federal funds target range to between 1.5 and 1.75 per cent. It stood at 0 to 0.25 per cent as recently as March.
What this means in practice is that housing affordability in the US has plunged. In money terms, the monthly mortgage repayments on a loan of $400,000 have jumped from about $1,700 to $2,500 in the space of just a few months.
The big question is are we in Europe soon likely to be experiencing these financial updrafts. European Central Bank (ECB) governing council member Klaas Knot suggested on Friday that bigger-than-anticipated interest rate hikes would have to be rolled out to halt the current surge in price growth.
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He said several half-point increases in interest rates could be needed if inflation worsens — indicating a possible move of that size in September may not be a one-off. Frankfurt indicated earlier this month it would begin a series of interest rate increases from next month, beginning with a quarter-point uptick on July 21st, the date of its next meeting.
Knot, an ECB hawk, indicated he thinks 200 basis points or 2 per cent of hikes are needed over the next several months. This would add €335 to the monthly repayments on a typical €300,000 mortgage and €670 for a €600,000 mortgage.
“The first 0.25 per cent increase to the lending rate might be absorbed by some of the banks. But it’s likely everyone will be facing higher rates before the end of the year,” said communications chief at price comparison website bonkers Daragh Cassidy.
Make no mistake, the current cost of living — fuelled by surging energy, transport and food prices — is going to get worse before it gets better.
