“This suggests that monetary policy is already quite tight,” Aird said.
“Many households that have a mortgage are having to cut spending to make those higher mortgage payments at a time when real wage growth is deeply negative.
“It will slow demand in the economy in 2023, and therefore also slow consumer price growth.”
The current RBA cash rate of 2.85 percent is expected to hit 3.1 percent in December after an expected eighth straight rate hike next month.
Financial markets are pricing in a peak cash rate of around 3.75 percent by mid-2023, according to Cash Rate Futures from the Australian Securities Exchange.
A borrower with an adjustable rate on a $500,000 mortgage is paying an estimated $760 a month since the RBA’s seven straight rate hikes, and potentially more than $1,000 more if expected rate hikes materialize in the future, according to RateCity.
For a $1 million adjustable rate mortgage, the monthly payments are already $1520 more and could top an additional $2000 by the peak of the rate hike cycle.
Home mortgage payments will reach about 9 percent of disposable household income across the economy by around the end of this year, dwarfing the previous peak of 12 years ago.
Although the RBA cash rate is well below 4.75 percent in 2010, mortgage debt is much higher.
According to the Australian Bureau of Statistics, the average new mortgage in Australia was $588,000 this September, compared to $364,000 in 2010.
RBA board minutes released this week noted that as a result of the rise in home loan interest rates that had already occurred during the year, home mortgage payments would continue to rise in the coming period.
“This included the effect of fixed rate loans that expire over time.
“Members noted that given the cumulative rise in interest rates ahead of the November meeting, scheduled mortgage payments as a percentage of household income are expected to increase to levels not seen since around 2010.”
Interest rates and principal payments could rise to nearly 10 percent if financial market prices prevail for further rate hikes next year.
However, an additional $270 billion in household savings during the pandemic has provided borrowers, particularly high earners, with financial buffers to fall back on.
Much of the excess savings sits in mortgage adjustment and redrawing accounts.
ANZ economist Adelaide Timbrell said the austerity buffers and low unemployment rate of 3.4 percent would help most households weather the financial squeeze.
“While consumer confidence is very low, consumer spending has been really solid, leaving most households with no lifestyle changes in the first seven months of rate hikes,” she said.
ANZ forecasts four more RBA rate hikes by the first half of next year, taking the top rate to 3.85 percent.
“The closer we get into tightening interest rate territory, the more household budgets will come under pressure,” Ms Timbrell said.
“We expect a slowdown in spending and a sustained fall in property prices to be far more powerful than changes in the economy [home loan] sinks because most people have jobs.”
While the RBA’s analysis of household cash flows suggests that the vast majority of borrowers would be able to withstand rising interest rates, many are having to rein in spending and reduce their savings.
About 15 percent of borrowers would not make enough money to cover their spending on essential goods and services and would have negative cash flows. These people would have to fall back on savings if they had any.
The RBA’s Financial Stability Review in October said: “This suggests that households overall are reasonably well positioned to adjust to a period of higher interest rates – however… the experience of individual households will vary significantly.”
“The majority of owner-occupiers with adjustable rate loans have the ability to adapt to a period of higher interest rates and inflation, in part because of their significant savings buffers.”
“However, a small portion of these borrowers are vulnerable to debt servicing difficulties and ultimately default.”
“Borrowers on fixed-rate loans have experienced rising living costs in recent months, but will also face potentially significant increases in mortgage payments as their fixed-rate terms expire in the coming period.”
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