Outer suburban electorates of major cities, already home to many of Australia’s most financially stressed households, are facing a “huge cliff” in coming years as their fixed-rate loans expire and they are hit with higher interest rates, analysts say.
Inflation data for the March quarter, released by the Australian Bureau of Statistics on Wednesday, underscored the rising cost of housing. New dwellings costs rose 13.7% – the biggest quarterly rise since the GST started in September 2000 – while rents resumed rising in Melbourne and Sydney and became more costly in other capitals.
But it was the surprise jump in both the headline and underlying inflation, easily exceeding market predictions, that will probably sharpen the pain by bringing forward and increasing the size of interest rate rises by the Reserve Bank of Australia.
Market economists had mostly assumed the RBA could hold off lifting its cash rate from its record low of 0.1% until June – after next month’s federal election.
But three of the big four commercial banks now expect an RBA rate rise next Tuesday, with rates rising steadily for months to ensure inflation doesn’t spiral out of control.
Data collected last year by researchers from the University of New South Wales found that of the 12 electorates where the majority of households were already under financial stress, nine were in outer metropolitan regions.
Interesting analysis by UNSW on which electorates have the highest financial stress - which presumably will be made worse as interest rates start to rise. (This data is from last year.) #ausvotes #AusVotes2022 #auspol pic.twitter.com/uWEiIK1wIw
— Peter Hannam (@p_hannam) April 27, 2022
“It’s not strictly speaking mortgage stress,” Prof Hal Pawson from UNSW said. “It’s people who are in financial stress who also have a mortgage.”
Those outer suburbs, mostly held by Labor, often include higher ratios of first-home buyers, some lured by government schemes during the Covid crisis. Many of these owners will have bought in near the top of the market and will not yet be in a position to earn pay rises since they bought, Pawson said.
An early RBA rate increase is not crucial in itself – other than causing political grief for the government this side of an election. But markets are already lifting rates and a bigger inflation number means future lending rates will probably be higher.
The National Australia Bank, for instance, has already lifted fixed rates on four-year loans by almost three percentage points – from 1.98% to 4.79% – in the past year, according to RateCity.com.au.
“There’s going to potentially be a huge cliff in two or three years’ time when their fixed-rate loan runs out because they’ll have to refinance,” Pawson said.
For those on an average mortgage of $600,000, adding three percentage points to the borrowing costs could swell repayments by $1,500 a month or more. “That’s going to be a lot for any household to swallow.”
Households surveyed by UNSW were deemed to be in stress if their residual funds after normal expenditure, including for housing, was less than 5% of income.
RateCity takes a more conservative assessment. It applied Westpac’s predictions – made before Wednesday’s inflation shock – that the RBA would hold off on lifting its cash rate until June but progressively lift it to peak at 2% by next May.
Average loan sizes were taken from the latest ABS data for February and released earlier this month. Borrowers were assumed to be on 25-year mortgages.
By these calculations, the impact on those households with $500,000 loans would be an increase in monthly repayments averaging $513 by May 2023.
While less than UNSW’s estimates, the impact of higher rates will still be significant, particularly as other costs such as fuel and food would probably be rising as well, according to Sally Tindall, a senior researcher at RateCity.
“There’s going to be some households that really have to take a long hard look at their budgets, and potentially make hefty cuts in numerous places to just keep their heads above water and their mortgage repayments up,” Tindall said.
“We’re looking down the barrel at not just one rate hike in isolation. There’s going to be multiple hikes.”
Inflation figures “have been blown out of the water”, so even if the RBA held off a month, there was still a lot of work to be done to curb inflation, she said.
Data from the Australian Prudential Regulation Authority showed the average mortgage holder had made the most of the Covid support payments – and limited spending opportunities – to be 45 months ahead on repayments. That tally, though, was an average and a lot people wouldn’t enjoy so large a buffer, Tindall said.
Those borrowers who lately had a change of circumstances – such as an added child to the family, a change of job or a business snarled by Covid – may struggle to make higher repayments.
In addition, “anyone who bought recently and potentially overstretched themselves to get into an overheated property market, they will feel the heat of these rate hikes, that’s for certain”, Tindall said.
