Reserve Bank deputy governor is confident most mortgage borrowers can cope with the rapid rise in interest rates, though analysts suggest many homes could soon face $ 1,000 a month or more in additional repayments. .
Key points:
- Nearly a third of borrowers could face a 40 percent increase in monthly mortgage repayments next year
- Monthly repayments could increase by $ 650 for a typical home with a fixed rate loan
- ANZ economists say the unemployment rate is likely to fall below 3%.
RBA Deputy Governor Michele Bullock said Australian households were generally in a good position to withstand upcoming interest rate hikes.
He said rate hikes are unlikely to increase the risks to financial stability stemming from the domestic sector.
However, despite his optimistic views on rising rates, he said extremely low interest rates during the pandemic had encouraged many people to take out fixed-rate home loans, with the share of housing credit on fixed rate mortgages jumped from 20 to almost 40 per cent.
And most of those fixed rates would expire next year, leaving millions of households moving to much higher variable rates, he acknowledged.
What will happen when fixed rates are renewed?
Speaking in Brisbane, Ms Bullock said the RBA board would be watching closely how households respond to rate hikes this year.
He said households with fixed-rate mortgages had so far been protected from rising interest rates.
However, most of these fixed rate loans are due to expire over the next two years, with the largest concentration of loans expiring in the second half of 2023.
“But what is the potential impact when they come out?” she asked.
He said, assuming variable mortgage rates would increase by 3 percentage points by mid-2023, so households with variable rates will face much higher mortgage costs next year.
“Assuming that all fixed-rate loans will be applied to variable mortgage rates and that the new variable rates are largely based on current market prices, estimates suggest that about half of fixed-rate loans [by number] would face an increase in refunds of at least 40 percent, ”he said.
“Borrowers with fixed-rate loans maturing in late 2023 would experience an average increase of about $ 650. [or 45 per cent] in their monthly installments.
“That’s a little more than the increase in payments that variable-rate borrowers would experience during that time.”
Get ready for four bigger rate hikes, ANZ warns
Prior to Ms. Bullock’s assessment of how households would cope with rising rates, the ANZ economics team significantly revised its cash rate forecast Tuesday morning, predicting that there will now be four interest rate increases over the next four months, worth 0.5 percentage points each.
This would bring the RBA’s cash rate target from 1.35%, where it currently stands, to 3.35% in November.
David Plank, ANZ’s head of Australian economy, said the labor market was becoming so tight that it contributed to inflation risks.
“Our long-term forecast is for the unemployment rate to drop to 3.3 percent by the end of 2022,” he said.
“The risks of this forecast seem to be weighted downwards, even with rate hikes a little faster than before.
“An unemployment rate with 2 levers is not in doubt.”
However, Mr Plank is also relatively relaxed about the effect the increase in mortgage repayments will have, given that so few Australians are out of work.
“The faster movement towards a restrictive-type establishment will advance the point at which the economy slows below the trend,” he argued.
“It also suggests that house prices will fall by more than 15 per cent, more or less, which we currently forecast by the end of 2023.
“But it doesn’t necessarily mean a hard landing for the economy. A cash rate of 3.35 percent means that household interest payments as a percentage of family income reach a peak below the level reached on 2008 “.
What about monthly mortgage repayments?
RateCity.com.au research director Sally Tindall said that if the cash rate reached 3.35 percent in November, as predicted by ANZ, someone with a $ 500,000 mortgage would see an increase their monthly payments at $ 909 in just seven months. , since the RBA began moving in May.
For someone with a $ 1 million mortgage, the monthly repayments would increase to $ 1,818.
“Borrowers knew the rate hikes were coming, but the size and pace of these has shocked households,” he said.
“Many families are already under the bomb with grocery and gasoline costs skyrocketing. Strong increases in mortgage repayments, in addition to that, could tip some.”
Who has the debt?
However, Bullock also said it was important to know who had the debt, because not all borrowers were equal.
He said most of the housing debt was tied to households that had the income to take care of it.
“If we look at households that have debt, almost three-quarters of the outstanding debt is held by households that are in the top 40% of the income distribution,” he said.
“Indebted households with 20% lower income distribution have less than 5% of debt.
The largest 40% of households for income almost three-quarters of outstanding debt (Source: Reserve Bank of Australia)
“In addition, households with high debt / income ratios [DTIs] those that could be most affected by rising interest rates are also usually high-income households.
“Higher-income households tend to dedicate a higher portion of their income to debt service because their other living expenses tend to account for a smaller portion of their income.”
He said this suggests that a large number of households could probably handle “slightly higher” interest rates.
What about falling house prices?
Ms Bullock also addressed concerns about falling house prices.
He said that if house prices fell by 20 per cent, the proportion of loan balances that would be in negative equity would increase from 0.1 per cent to 2.5 per cent, it was 2.25 per cent. before the pandemic.
“Negative equity” is a situation where the value of your property falls below the amount of money you still owe with your mortgage.
“Scenario analysis based on loan-level data suggests that a 10% drop in house prices would increase the proportion of negative equity balances to 0.4%, which is still well below its maximum of 3.25% in 2019 “. she said.
“Even a 20 per cent drop in house prices would only increase the share of balances in negative equity to 2.5 per cent.
“This low incidence of negative capital reduces the likelihood that borrowers will default, as well as the size of the losses that lenders would suffer if they did.”