Rates are up and people are fretting about the housing market. Borrowers are struggling with one of the swiftest interest rate hiking cycles in a generation. The cash rate was 0.1% in April, 1.35% today and markets expect it to be 3.4% in December. Michele Bullock, the RBA’s deputy governor, said yesterday that the ability of Australian households to pay for an impending higher level of mortgage repayments. It was the first time the central bank has spoken in detail on the issue since its bi-annual Financial Stability Review in April.
Two housing market ticking time bombs
Bullock had bad news for mortgage holders on Tuesday, with people on all types of fixed and variable loans in for stress-inducing repayment surges in 12 months’ time. In her speech, Bullock revealed the findings of an RBA exercise in modelling which simulated the hit to mortgage holders if interest rates climbed by three percentage points over the year ahead. The model calculates that almost a third of variable-rate borrowers would see repayments rise by at least 40%.
Homeowners are already contending with a sharp rise in mortgage repayments. The average for the big four was 2.57% one year ago, according to RateCity. Today it's 3.29%, a 72 percent rise.
The many people who took advantage of ultralow fixed-interest rates to refinance their mortgages during the pandemic are also in for a repayment scare. Assuming all fixed-rate loans roll over to variable mortgage rates, the central bank expects about half of those loans will experience repayments increase at least 40%. The median borrower for fixed-rate loans set to expire at the year end 2023 faces a rise of $650 in monthly payments.
Overly rosy future
The RBA scenario was based on no change to unemployment, a very dangerous assumption, according to AMP Chief economist Shane Oliver. “There is no allowance in the analysis for a change, an increase, in employment circumstances,” he said. “[The report] kind of says on average it will be fine but if people lose their job and the economy is going into recession it is another story.”
“Interest rate rises aren’t happening in a vacuum with a cost of living that’s well and truly skyrocketing and wages are not keeping up with it,” he added. The notion that unemployment is staying put at record lows comes at a time of simmering global recession fears spilling over into already bearish equity markets.
Well first time home buyers, beware!
Recent first home buyers were joined by highly leveraged households and new borrowers as being most at risk, for their savings may be lower, Bullock said. “First home buyers have traditionally had relatively higher loan to valuation ratios and less liquidity than other borrowers, and hence are more vulnerable to the impact of a given house price or income shock,” the deputy governor said.
But the RBA is not worried
If so, Bullock noted a few reasons the housing market should continue to remain relatively stable as the cash rate increases: There were big equity buffers thanks to years of house price appreciation and large pools of savings. Australians have had decades of record price growth in several major cities, and the pandemic has seen that surge even further. That’s left many homeowners with lots of equity that could help insulate them from a drop in home prices.
Then there is the $260 billion dollar households stashed away during the pandemic, thanks to government support and limited opportunities to spend. This should help to soften the leap in mortgage repayments, Bullock says.
“The household saving rate increased strongly [during the pandemic] and many households held quite large liquidity buffers, including mortgage-holding households,” Bullock said. The RBA model revealed a third of variable rate borrowers would not be worse off in terms of repayments, as they are already paying three per cent on average more in repayment than what is required on a 3% rate hike.
Most of the debt is owned by the rich
One factor behind the bank’s optimism was that most of the biggest and most vulnerable borrowers were high earning households, Bullock said. Households in the top 40 percent of the income distribution hold more than three-quarters of Australia’s mortgage debt. They’re also more likely to be among those with the highest levels of debt to income. “Higher income households can usually afford to put a larger share of their incomes toward debt serving because other living costs are a smaller share of income,” she said.
