Rate hikes threaten to gobble up federal budget servings
The parallels between the Australian Government’s annual deficits and mortgage borrowers on the brink of financial stress are striking, highlighted by data released on the same day the federal budget was released.
The parallels between the Australian Government’s annual deficits and mortgage borrowers on the brink of financial stress are striking, highlighted by data released on the same day Treasurer Josh Frydenberg delivered his federal budget.
As the latest $99.2 billion annual deficit pushed debt to a record $868 billion, financial comparison site Canstar found one-third of borrowers at or close to the edge of being unable to meet household costs.
The survey of 900 people found 14 per cent already at their limit and 19 per cent saying a weekly increase in living costs of up to $100 would push them into financial stress.
If weekly expenses rose by $101 to $200, a further 23 per cent of borrowers say they would feel the squeeze, while close to another third (34 per cent) say an increase of between $201 to $500 would push them over their limits.
The 2022-23 budget released Tuesday night (29 March) has been touted by Mr Frydenberg as one focused on easing the cost-of-living for households and helping first-home buyers by doubling the scope of the Home Guarantee Scheme.
A key component of the assault on rising costs is one-off cash payments of at least $250 for pensioners and welfare recipients and a temporary modest cash payment for people earning less than $126,000.
Increases to childcare subsidies have also been forecast to save as many as 250,000 families an average of around $125 per week.
Whether this is enough to stave off debt and stress for stretched mortgage holders faced with rising interest rates is yet to be seen.
Survey findings: Thinking about the weekly cost of living, how much would your weekly living costs (eg. food, mortgage/rent, essentials) need to rise by, to push you into financial stress?
|I am already at my limits and any increase would push me into financial stress||14%|
|Up to $50||7%|
|More than $500 before it would push me into financial stress||12%|
Canstar analysis shows a mortgage interest rate increase of just 0.5 per cent would send the average variable home loan rate to 3.49 per cent and add an extra $137 to the monthly repayment for a $500,000 loan over 30 years. This equates to an extra $32 per week to the household budget.
But most economists are predicting significantly more punishing interest rate hikes.
In a research note for the Commonwealth Bank, its chief economist Stephen Halmarick said the cash rate could be increased from 0.1 per cent to at least 1.25 per cent, which could see variable mortgage rates increase from 2.28 per cent to 3.53 per cent.
With the average size of an Australian mortgage set at $595,568, this could see annual interest repayments soar from around $13,400 to $21,023.
If the cash rate rose even further, by as much as the 1.65 per cent forecast by Westpac, and the average variable rate reached 4.64 per cent on the aforementioned loan, this would add $470 to monthly repayments or an extra $108 to weekly expenses.
Borrowers with larger loan sizes will feel the squeeze even tighter, according to Canstar Group Executive and chief commentator, Steve Mickenbecker.
“With property prices moving up by as much as they have over the past couple of years, million-dollar loans are anything but rare - they are almost the norm for more recent buyers,” he said.
“If the average variable rate rose by 1.65 per cent, the increase to monthly repayments on a million-dollar loan would be close to $940, or $217 extra per week.
“Increasing home loan repayments by more than $200 a week puts the price increases at the supermarket and petrol bowser into the shade, and demands that, if they can, borrowers should be looking for a lower rate loan now before higher interest rates take the opportunity away.”
The current inflation rate is sitting at a 12.5 year high of 3.8 per cent, considerably higher than the RBA’s target band of 2 to 3 per cent.
The budget’s deficit-feeding spending could coax the Reserve Bank of Australia to act on its historically low cash rate.
Australia now has the dubious distinction of having the second-highest levels of household debt globally, at 119.3 per cent of GDP, and the implications of a rate rise would be felt more strongly here than anywhere else.
Gareth Aird, Head of Australian Economics in CBA’s Global Economics and Markets Research division, has told the media that a big spending budget could stir inflation and undermine the budget’s goal of reducing household financial stress.
“Policies that seek to help households deal with higher consumer prices by adding to demand in the economy will put further upward pressure on prices.”
“In turn, this would increase the likelihood of the RBA increasing the cash rate - and thus push up interest rates.”
First-home buyer relief
The government is spending an estimated $8.6 million to help first-home buyers, single parents and regional Australians get into the property market.
It will more than double the current number of places available per year under its Home Guarantee Scheme, which dramatically lowers the deposit required to buy a home to just 5 per cent, instead of the usual 20 per cent.
The First Home Guarantee (previously known as the First Home Loan Deposit Scheme) is aimed at first homebuyers in major cities and will now have 35,000 places per year. That is up from 20,000 places this financial year.
A newly created Regional Home Guarantee, with 10,000 places, will focus on helping prospective homebuyers in regional areas.
The Family Home Guarantee, which is targeted at single parents who are either buying their first properties or seeking to re-enter the housing market, will see its allotment doubled to 5000 places. Beneficiaries of this scheme can buy homes with a deposit of just 2 per cent.
Participants must be buying a home to live in, not an investment, and property prices vary according to location and whether or not a new or existing home is being purchased.
Although property prices rose 25.5 percent in the regions and 19.2 per cent in capital cities, no change to price caps were included in the budget.
Jobs and confidence
Promises made in the lead-up to the budget’s delivery by the Government to attack cost of living pressures did little to assuage the mood of Australians worried about inflation.
The weekly ANZ-Roy Morgan consumer confidence index fell for a third straight week, down 0.1 per cent at 91.1. The index is seen as a guide to future household spending.
Mr Frydenberg said he expected the deficit to shrink by tens of billions of dollars as unemployment reached 50-year lows.
HIA Managing Director, Graham Wolfe said this budget coincides with the housing industry facing some of the greatest challenges on record.
“The critical shortage of skilled trades workers that we are experiencing today is the outcome of a sustained decline in apprentice numbers over a long period.
“The Boosting Apprenticeship Commencements (BAC) scheme turned this trend around, with apprentice and trainee commencements in the year to September 2021 increasing by 88 per cent compared to the previous year.
“The new Australian Apprenticeship Incentive System will take over from the BAC on 1 July.
“Acknowledging the need to incentivise people to start training makes great sense, as does continuing to support employers to take on those wanting to start their career in a trade.
“ Supporting home builders to meet the housing needs of all Australians will deliver on the nation’s home ownership aspirations.”
BFP Property Buyers Founder and PIPA Member, Ben Plohl, said the big investment in strategic infrastructure programs in the regions was a sign that the tree- and sea-change phenomenon was not likely to be reversed anytime soon.
“The very latest ABS regional migration figures, out today, showed that Australia's regional population grew more than the capital cities for the first time in more than four decades,” Mr Plohl said.
“This significant infrastructure spending of $7.1 billion, further strengthens our belief that the regions will continue to offer excellent investment opportunities.