First home buyers will be forking out up to 40% of their average disposable income on mortgage repayments if the Reserve Bank proceeds as widely expected with two more rate rises in 2023, according to projections by the Australian National University.
The share of debt repayments for all mortgagors has already risen from a near-40 year low of 17% of average income in 2019 to 25.1% after the RBA began lifting its official gauge 12 times in its past 13 rates meetings.
The bank’s board meets on Tuesday with investors and economists split over whether a 13th hike – of another 25 basis points, to 4.35% – or a pause is the likely outcome.
The squeeze of household budgets will probably be tightest for those who bought recently and those on low incomes such as single-parent families, according to ANU’s model of tax and transfers, PolicyMod.
Ben Phillips, a principal research fellow at ANU’s Centre for Social Research and Methods, said first home buyers who bought in the past three years were among the groups that worried him the most in terms of being able to meet debt repayments.
Average mortgage costs have already gone from almost $500 a week in 2019 to $864 before any further RBA rate increase. Should the central bank lift the cash rate 50 more basis points, as many economists predict, by the end of the year weekly mortgage repayments will climb to $901.
That amount would be “nearly 40% of their disposable income”, Phillips said. “That’s a huge amount of money to go on housing.”
Hopes that the RBA may be near the end of its rate increases were bolstered by last week’s release of monthly consumer prices showing headline inflation had retreated to 5.6% higher, the smallest increase since April 2022.
Other recent measures, though, suggest demand in the economy may not have cooled a much as the central bank wants. The jobless rate, for instance, surprisingly declined in May, while job openings remained high and consumers have kept spending.
Among the big four banks, ANZ, NAB and all expect the RBA to hike rates by another 25 basis points on Tuesday. CBA says the probability of a pause is 60:40.
UBS's George Tharenou has correctly picked the past 11 RBA rate decisions. Will his prediction of a pause on Tuesday make it 12 from 12? pic.twitter.com/sncrTrsISA
— @phannam@mastodon.green (@p_hannam) July 3, 2023
Phillips said single-parent households with mortgages were another group facing a steep increase in the share of income spent on housing. Since 2019, the average proportion would rise from 24.3% in 2019 to 36.5% by year’s end on current interest rates, with a 38% share a prospect if the RBA lifted the cash rate to 4.6%.
Single-person households, who often have low incomes, would see an even faster increase. As of 2019, the proportion of weekly earnings is on track to climb from 25.8% to 37.4% on current borrowing costs and higher again to 38.8% if the RBA struck twice more.
“We find that single people and single parents are the ones who struggle the most,” he said. “Couples with kids generally do a little bit better”, aided by incomes that can be at least twice those of a typical lone-person household.
So-called “change-over households” that were paying off a loan on a property after selling one earlier, tend to be in a better position financially even if they bought recently. By contrast, first home buyers tend to be younger and have a smaller amount of equity in their property so that their loan is closer in size to the purchase price.
Interest rates remain relatively low compared with the 1990s, the last time the RBA was hiking borrowing costs with the same urgency. However, average loans are now much larger, so the rise in overall repayments was “really off the charts”, Phillips said.
Should interest rates go higher and remain so, many households “will be constrained in their spending feed for many years to come”. Whether households can cope with the added financial stress will hinge a lot on the jobs market, he said.
“The unemployment rate is the variable here,” Phillips said, with households with incomes able to make do by curtailing spending on things such as overseas holidays. “Whereas if suddenly unemployment becomes an issue … then all bets are off and you start to look at forced [home] sales and things like that.”
The PolicyMod is based on ABS survey data undated with wages and mortgage costs.
