Australians with mortgages are so far mostly managing to cope with higher interest rates, but the full impact of recent rises is yet to be felt and increased costs for energy are still to take effect, economists say.
A gauge of financial stress run by credit analysis company Fitch Ratings found instances of people falling behind in mortgage repayments by 30 days or longer were at 0.82% in the June quarter, the lowest level in at least 20 years that its Dinkum RMBS Index has been running.
Natasha Vojvodic, head of Australian structured finance at Fitch, said delinquencies were “very low” but the Reserve Bank was still only partly through its rate-hiking cycle.
“We’re expecting some increase in arrears,” she said.
Lots of chatter about mortgage pain as interest rates rise but the latest 'Dinkum RMBS Index' from @FitchRatings has the number at 30+ days in arrears at record low level at the end of June. Still, there's probably only one way for the index to go from here... pic.twitter.com/Dw0kVGu9FJ
— Peter Hannam (@p_hannam) September 5, 2022
The unemployment rate, down to a 48-year low of 3.4% in July, was helping households keep up with repayments.
The savings rate, down recently from its Covid lockdown peak, was also higher than pre-pandemic levels, Vojvodic said.
The RBA is widely expected to raise its cash rate on Tuesday for a fifth time in as many months. Most economists are predicting a 50-basis point increase in the rate to 2.35%, which would bring it to the highest level since early February 2015. Rates haven’t risen this fast in 28 years.
Assuming commercial banks pass on the increase in full, a half-percentage point increase would add another $144 a month in mortgage repayments for each $500,000 borrowed, according to RateCity, a financial data firm.
Assuming the Reserve Bank lifts its cash rate to 2.35% on Tuesday, here's how much more someone on a 25 year mortgage will repay per month (and how much more since rates started to rise in May). (Source: @RateCity ) pic.twitter.com/1fB04kjGCP
— Peter Hannam (@p_hannam) September 5, 2022
CBA economists said home borrowers had “barely felt” the first 175 basis points of tightening so far as there is an average three-month lag between the RBA’s move and the higher rate affecting variable mortgages.
“The lag largely explains why the official spending data has remained strong but consumer sentiment sits at levels associated with a recession or major negative economic shock,” the economists said in a briefing note.
“We expect consumer spending to slow materially as the lagged impact of rate hikes hits home borrower cashflow.”
Gareth Aird, CBA’s chief economist, said the RBA was likely to keep lifting the cash rate to about 2.6% before pausing to see if inflation was starting to abate.
“Taking the cash rate higher would likely generate a hard landing in the economy,” he said.
Investors, though, continue to bet the cash rate will rise higher, nearing 4% in a year’s time.
Ahead of Tuesday's expected RBA board meeting investors are rating likelihood of a 50 basis point increase to 2.35% as more than a 4-in-5 chance. For now, they're tipping cash rate peak in a year's time at just under 4%. (Economists: 'hard landing' ahead if that's the outcome.) pic.twitter.com/ksDawn3WFr
— Peter Hannam (@p_hannam) September 5, 2022
UBS economists last week said a cash rate peak near 4% would be “too aggressive, as it would likely crash the housing market and drive a recession”.
Fitch said it expects home prices to fall for the remainder of 2022 and into 2023 as affordability remains constrained and borrowing costs rise.
Still, “losses from the sale of collateral property should stay low due to strong home-price growth over previous years,” it said.
Even if property prices were to fall 20% from their peaks – which Fitch is not predicting – most regions would still be more expensive than prior to the pandemic, Vojvodic said.
Separately, data in the third State of the Nation in Suicide Prevention report, to be released by Suicide Prevention Australia on Tuesday, found 70% of Australians had reported elevated mental distress compared with this time last year.
Of the factors adding to stress, cost-of-living and personal debt woes were the highest cited, with 40% of respondents singling out those matters.
Adding to the pressure on finances will be the end of the 22.1 cents per litre excise cut on motorists’ fuel on 29 September. With GST and indexing added in to take account of inflation, the increase will be slightly above 25 cents, Treasury confirmed on Monday.
The latest weekly data from the Australian Institute of Petroleum said retail unleaded petrol prices averaged 172.9 cents in the week to 4 September, easing from 177.3 cents a week earlier.
