Australian households are among the most indebted in the world and the start of interest rate increases by the Reserve Bank will generate “a big potential problem” for many people and the wider economy, a University of New South Wales researcher predicts.
Chris Martin, a senior research fellow in UNSW’s City Futures Research Centre, said data from the Bank of International Settlements showed total credit to Australian households amounts to about 120% of annual GDP.
That ratio trails only Switzerland’s 130% and was far higher than the average of about 75% for advanced economies.
Major banks have already lifted interest rates for mortgages and other loans, matching the RBA’s 0.25 basis point increase on Tuesday.
The RBA governor, Philip Lowe, said the cash rate could increase to 2.5% while investors are tipping it will rise to about 3.75% by May 2023.
After the surprisingly large RBA rise to 0.35%, the prime minister, Scott Morrison, said “we have avoided in Australia … what is happening in those countries”, referring to countries such as Canada and New Zealand which have higher inflation rates than Australia’s 5.1% year-on-year increase recorded in the March quarter.
But Martin said Australia’s relatively high household debt load compared with those nations – plus the fact Australia’s inflation rate could still catch up with similar economies elsewhere – increased the risks facing families.
“We have a big potential problem courtesy of the way we have run our housing system, for not just the last decade but for the last at least three decades,” Martin said, referring to policies that encouraged people to take on more debt, particularly to purchase investment properties.
Each percentage point increase adds on average $323 in monthly repayments, although some cities, such as Sydney are much higher at $486, according to CoreLogic data. Car loans and credit card debt will also be more costly to repay at a time when the price for fuel and many other goods is rising, adding to families’ financial stress, Martin said.
“The intense concern about interest rates reflects Australia’s world-beating levels of household debts,” he said.
“Our housing system is only weakly governed by real housing policy objectives, that is, ensuring everyone can own or rent a decent affordable home. Instead, it is governed by objectives of wealth creation, and sometimes by concerns about financial system stability.” Such as after the 2015 Murray review into bank risks.
Data from the Australian Bureau of Statistics released on Wednesday showed investor loans in March for housing rose 2.9% to a record $11.71bn, up almost half from a year ago. Loans taken out by owner occupiers rose 0.9% to $21.57bn, down about 2% from a year earlier.
Matthew Hassan, a senior Westpac economist, said the March data would likely “prove to be the high-water mark for this cycle with turnover already off sharply” as the market cools as rates rise. He said property prices are “expected to enter a broad-based and correction phase in coming months that is expected to continue through the rest of 2022, all of 2023 and the first half of 2024”.
However, Lowe and market economists don’t see any immediate threat of rising defaults even given Australia’s household debt levels.
The RBA governor said after the rate rise on Tuesday households had “squirrelled away” an extra $240bn during the pandemic, and average mortgage repayments were running two years ahead of schedule compared with only one year in 2018. Moreover, the RBA is predicting GDP growth of more than 4% this year before slowing, and the jobless rate is headed toward half-century lows of about 3.5%.
Alan Oster, a National Australia Bank senior economist, agreed households were highly exposed to big rate rises but said analysis used by the BIS and others ignored the asset side of the equation. “So, on the net asset to GDP comparison, we are one of the best out there,” he said.
“This is not to say it’s not important but the RBA and others know that,” Oster said, adding that “there obviously is a fear that while households will not fall over, they might get scared and stop spending”, denting economic growth.
Markets are predicting a particularly steep cash rate increase by the RBA by its July meeting, as part of a ongoing series of increases. #auspol #ausvotes #AusVotes2022 pic.twitter.com/LYpqmzkOuf
— Peter Hannam (@p_hannam) May 4, 2022
ANZ’s head of Australian economics, David Plank, said households’ cash buffers do matter. “If you look at household debt after taking into account offset accounts and deposits then it looks much more manageable,” he said.
“But debt is high even taking this [buffer] into account and it’s mostly floating or only fixed for the short term. [That’s] why most analysts and the RBA think the cash rate won’t rise as fast here as it will in the US.”
Martin predicted that lending conditions aimed at curbing risky borrowing that were loosened to support the economy during the Covid pandemic would have to be tightened again. While buffers may seem large, the average repayment rates masked what would probably be growing numbers of people in financial distress.
A spokesperson for the Coalition’s campaign highlighted Lowe’s comments that “household and business balance sheets are generally in good shape” and the more than doubling in early repayments by borrowers.
The Greens party leader, Adam Bandt, said: “People are in so much debt because incomes are flat, and housing prices are inflated by public tax handouts to wealthy property moguls.”
“The debt burden on everyday people will keep getting worse if Liberal and Labor keep giving $6bn a year to the very wealthy to push up house prices,” he said.
The Greens would seek to restrict negative gearing to one investment property, scrap the 50% capital gains tax discount and build 1m affordable homes “so that people locked out of the market have a new pathway in,” he said.
