There are two largely conflicting views on what will happen to house prices in 2022, but this graph does not bode well for anyone paying a mortgage.

The huge showdown for 2022 will be over interest rates. Market plans three rate hikes, RBA says there won’t be. Who is right?

The tension here is very important, because if interest rates rise this year, the expected drop in house prices could occur sooner than expected.

If you own a home or if you want to, the future of interest rates is very important to you. Rising interest rates will make it more expensive to obtain a mortgage. Plus, higher rates will reduce the amount people can borrow to buy a home, meaning home prices could go down.

If you believe the market, interest rates are expected to rise at least three times in 2022. Check out this following chart.

Each blue bar represents a month, from January 2022 to May 2023. The height of the blue bar corresponds to what the market “expects” from the official interest rate at that time. In June 2022, the market expects official interest rates at 0.22%. In December, he expects 0.83%. That’s a big increase in just 11 months.

When the financial news speaks of the market “incorporating” rate hikes over the next period of time, this is the chart they are referring to.

Now you might be looking at this graph and thinking the expectations are looking weird. The RBA typically increases interest rates in 0.25% increments. Why is the chart showing numbers like 0.22% instead of more plausible numbers like 0.25%?

The reason for this is that it is not a true “forecast” made by one person. It is simply the result of different people buying and selling financial assets called “futures”.

At the top, it says “implied yield curve”. It is important to remember. This graph is made by examining the price of certain financial assets and calculating from these prices what the market implies about the future of the official interest rate. It changes all the time as the price of these assets changes.

The story we get by looking at market prices is particularly interesting right now because it is very different from the official story. Where the market expects at least three rate hikes in 2022, interest rate makers expect none.

RBA Governor Philip Lowe has repeatedly stated that he does not expect to raise interest rates in 2022 because he does not expect inflation to rise. He gave a big speech in December where he once again insisted on this point.

“The Reserve Bank Board will not increase the cash rate until real inflation is durably within the target range of 2-3%,” he said.

“We are still a long way from that point. In our central scenario, the condition of an increase in the cash rate will not be met next year. It will probably take time for this condition to be fulfilled and the Council is ready to be patient. “

The market clearly doesn’t think it will be patient, or doesn’t think inflation will stay low.

Right now, house prices are expected to drop in 2023, when the RBA hinted official interest rates may finally rise. But if interest rate hikes come sooner, lower house prices could also come sooner.

What would force the RBA to do as the market expects and raise rates in 2022? The answer is high inflation. As the following chart shows, inflation is skyrocketing in the United States and Europe. Is Australia on the same track?

The most recent data for Australia showed inflation has risen 3 percent in the past 12 months. Some things have gotten much more expensive, like gasoline, while other things like clothes, shoes, and phone bills have gotten cheaper.

Three percent inflation is higher than we’re used to, but certainly not as high as America or the United States, and probably not enough to freak out the RBA and raise interest rates.

But the supply chain issues that caused the prices to rise continue, and inflation may spill over to other categories.

Inflation data is only released four times a year, and the next release will be on January 25, covering the period October to December 2021. If it shows a continued rise in prices, you can bet the market will start to incorporate even more inflation hikes in 2022, and there will be even more disbelief in the official RBA line not to raise interest rates this year.

So was inflation high in October, November and December last year? If the answer is yes, then the odds of a rate hike in 2022 increase and the future of house prices becomes much more volatile.

Jason Murphy is an economist | @jasemurphy. He is the author of the book Incentivology.