The Reserve Bank believes most Australian home buyers will withstand its aggressive increase in interest rates while revealing a majority of borrowers will face a 20 per cent cut in their household cash flow over the next two years.
Admitting that some households were already feeling the strain from the 2.5 percentage point increase in official interest rates since May, the Reserve Bank signalled on Friday it believed people with large debts still had the financial buffers to withstand even-higher borrowing costs.
The Reserve Bank believes Australian borrowers will withstand the lift in official interest rates.Credit:Louie Douvis
The bank this week increased official interest rates by another quarter percentage point, its sixth consecutive monthly lift. While the rate rise was smaller than expected, the bank said people should expect further increases in coming months.
The Reserve Bank’s six-month financial stability review, which canvasses the strength of the finance sector, shows it is monitoring the possible risks posed to banks and lenders by the nation’s exposure to the property market and higher interest rates.
But it believes despite higher mortgage repayments and the pressures caused by wages growing slower than inflation, borrowers were in a relatively strong position.
“Households, firms and banks are generally entering this more challenging environment in a strong financial position, though pressures on household budgets and business cash flows are rising and housing prices are declining,” it said.
“Many Australian households and businesses built up substantial savings buffers during the pandemic, and strong growth in incomes has supported the recovery in household consumption and contributed to low levels of loan arrears.”
However, analysis by the bank shows people will feel financial pain from higher interest rates.
It found the increase in interest rates since May would deliver a $1300 a month hit to the finances of a household with a combined income of $150,000 and carrying $800,000 in debt. That is about 13 per cent of their disposable income.
For a household with a similar combined income and carrying $600,000 in debt, they have taken a $1000 a month hit, or 10 per cent of their disposable income.
Financial markets expect the Reserve Bank to take the official cash rate to 3.6 per cent by the middle of next year.
If that happens, the bank’s research suggests half of all borrowers with a variable mortgage interest rate will suffer a fall of more than 20 per cent in their “spare cash flow”.
About 15 per cent of borrowers would suffer negative cash flow as the “combined burden of higher interest payments and the higher cost of essential goods and services exceeds their initial spare cash flows”.
Forty percent of mortgagors would suffer a fall in their household cash flow of less than 20 per cent.
While the bank appears sanguine about those with variable rate mortgages, it did note the pressure facing those who took out fixed rate loans at low interest rates through 2020 and 2021.
It estimates that if official interest rates reach 3.6 per cent, almost 60 per cent of borrowers with fixed mortgages will experience a 40 per cent jump in their minimum repayments when they come to refinance their loan.
The bank revealed that in its contact with the broader community, there are early signs of some financial pressure.
“Information from the bank’s liaison program also suggests that demand for a range of social and community services, including low-cost housing and food services, has increased of late,” it said.
“Some households are already feeling the strain from higher interest rates and inflation, and this is likely to continue for some time.”
Treasurer Jim Chalmers, who said the global economic outlook was continuing to deteriorate, said the Reserve Bank report highlighted the financial challenges many people were facing.
“Australians have a buffer in their personal finances, but many don’t. And so, six consecutive interest rate rises in six months – which began before the election and continued after the election in expected-but-still-difficult ways – will, and is, having an impact on the finances of ordinary Australians,” he said.
Tapas Strickland, head of market economics at NAB, said the RBA’s report suggested the bank believed it could continue lifting rates without threatening the overall economy.
“The analysis suggests households should be able to weather an RBA cash rate of 3.6 per cent without raising any financial stability concerns,” he said.
“Whether the cash rate needs to get to that level will, of course, depend on the outlook for inflation and how households respond to higher rates.”
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