The Reserve Bank of Australia and economists have revealed the grim reality facing many struggling homeowners, with loan repayments likely set to further rise.
According to minutes from RBA’s November meeting released last week, the increase in interest rates so far would potentially result in more increases in housing mortgage rates, including the effect of fixed interest rate loans rolling off over time.
Australia’s central bank said: “Given the cumulative increase in interest rates prior to the November meeting, scheduled housing mortgage payments as a share of household income were expected to increase to levels not seen since around 2010,” ABC reported.
“Payments into offset and redraw accounts were still high, but somewhat less over 2022 than the preceding year,” the RBA said. “Housing loan commitments had declined further for both owner-occupiers and investors, reflecting the effect of monetary policy on housing lending.”
Australia’s unemployment fell back to a 48-year low of 3.4% in October. Gareth Aird, head of Australian economics at Commonwealth bank, said the news was a “rubber stamp” for the RBA to lift interest rates by 25 basis points at its December meeting, news.com.au reported.
“We believe the RBA are very aware of the risk of over-tightening and inadvertently engineering a hard landing,” Aird said. “We expect the labour market data to loosen over coming months as the lagged impact of hikes slows demand and the continual lift in foreign arrivals adds to labour supply.”
Raising the OCR for the eighth consecutive month in December by 0.25% would take interest rates to 3.1%, with markets pricing in a peak cash rate of about 3.75% by mid-2023, according to Australian Securities Exchange cash rate futures.
Following the latest hike, a variable-rate borrower with a $500,000 mortgage will pay an additional $760 per month — and could hit more than $1,000 if more hikes happen, RateCity said.
In its twice-yearly financial stability review released last month, the RBA acknowledged that inflation and rising interest rates would make it difficult for some Australians to repay their debts.
The RBA said a small group of borrowers would likely fail to pay their debt due to low savings and high levels of debt, news.com.au reported.
“Financial stress could be more widespread if economic activity turns out to be much weaker than expected,” the central bank said. “Higher interest rates will increase borrowers’ debt payments. Despite a strong labour market, income growth has not kept up with inflation in Australia, leaving households with less capacity to service their debts.”
