RBA deputy governor warns recent home buyers most at risk of rate rises

Reserve Bank Deputy Governor Michele Bullock has used her first major speech to warn of the inevitability of more interest rate rises, saying most households were well placed to weather the storm but that some would be sorely tested.

RBA Deputy Governor Michele Bullock.
How much the RBA decides to raise rates will depend on developments in the economy, including how borrowers respond to higher rates, RBA Deputy Governor Michele Bullock said. (Image source: Shutterstock.com)

Recent homebuyers and the those that are highly indebted are vulnerable to the interest rate rises that the RBA has confirmed today are inevitable.

Delivering her first major speech since being appointed in April, Reserve Bank Deputy Governor Michele Bullock made it clear that borrowers could expect to be hit with a string of further interest rate hikes in the coming months.

Just how intense the interest rate hiking regime will be is open to debate but the ANZ is in no doubt it will be severe.

ANZ on Tuesday (19 July) revised its cash rate forecast, predicting there will be four more 0.50 percentage point hikes in the next four months, taking the cash rate to 3.35 per cent by November.

“Our expectation is that the RBA will deliver this via four more successive 50 basis point rate hikes in August, September, October and November,” ANZ head of Australian economics David Plank wrote.

The cash rate target has been increased by 1.25 per cent since May to 1.35 per cent and the RBA Board expects further increases in the cash rate will be needed in the months ahead. 

Ms Bullock’s speech in Queensland to the Economic Society of Australia was titled How Are Households Placed for Interest Rate Increases? and she went on to answer her own question by saying “households in aggregate are well positioned and their balance sheets in very good shape.”

“The high level of debt held by Australian households might, on its own, suggest that many households will face difficulties as interest rates rise, with implications for their ability to service that debt, consumption and the economy more broadly, however, there are a number of factors that suggest considerable resilience in the household sector to rising interest rates,” Ms Bullock said.

“First, aggregate household balance sheets are in very good shape.

“While households have high levels of debt, this is accompanied by sizeable holdings of assets.

“Strong growth in housing prices over 2021 and early 2022 has boosted asset values for many homeowners, with housing assets now comprising around half of household assets.

“The small decline in housing prices in recent months has only marginally eroded some of the large increases seen over past years.”

“Furthermore, households have saved a large amount of money since the onset of the pandemic – around $260 billion and these savings have been put into redraw facilities as well as offset and deposit accounts.”

But she also stressed that not all households were the same and some are very vulnerable to rising interest rates.

Stress ahead for some

She singled out higher income households with similarly high debt levels, first-home buyers, recent home buyers, and other overly indebted households as being at greatest risk.

Inflation was also acknowledged as a source of stress for indebted households, as their earnings were eaten away by higher prices.

“If we look at the households that have debt, almost three-quarters of debt outstanding is held by households in the top 40 per cent of the income distribution; indebted households in the bottom 20 per cent of the income distribution hold less than 5 per cent of the debt,” Ms Bullock said.

“Higher income households can typically devote a higher share of their incomes to debt servicing because their other living expenses tend to account for a smaller share of their income, which suggests that a large number of households are likely to be able to handle somewhat higher interest rates.”

ANZ forecast: Impact of 3.35% cash rate by November
Note: Calculations are based over 25 years.

Loan size Repayments April 2022 Repayments Nov 2022 Difference
$500K $2,335 $3,244 $909
$750K $3,502 $4,866 $1,363
$1M $4,670 $6,488 $1,818

Source: RateCity.com.au. Based on an owner-occupier paying principal and interest with 25 years remaining. Starting rate is the RBA average existing owner-occupier variable rate of 2.86 per cent in May.

“Recent borrowers are more vulnerable than earlier cohorts, as they are more likely to have borrowed at high debt-to-income ratios, have had their serviceability assessed at lower interest rates (albeit with larger interest rate buffers) and have had less time to accumulate equity and liquidity buffers.

“Government policies to improve housing market accessibility for first home buyers (FHBs) during the pandemic also means that FHBs are more highly represented among this group of recent borrowers than they are in earlier cohorts.

“Historically, FHBs have tended to have persistently higher LVRs and lower liquidity buffers than other borrowers, making them more vulnerable to a given house price or cash flow shock.”

The bold prediction by the ANZ that the official cash rate will hit 3.35 per cent this year is a significant increase from their earlier call, which previously forecast the cash rate would not get to over 3 per cent until early 2024.

Meanwhile, CBA updated its forecast on Friday and is predicting a 2.60 per cent cash rate by November.

In its July minutes released today, the RBA said it’s prepared to do what is needed to bring inflation under control. It noted other central banks are acting on inflation, including the U.S. Federal Reserve, which hiked its target range by 0.75 percentage points in June. The European Central Bank is also expected to hike its policy rate for the first time in 11 years when it meets Thursday (21 July).

RateCity.com.au research director, Sally Tindall, said: “While the jury is still out on exactly where the cash rate will land by Christmas, borrowers need to brace for significantly more rate pain.”

“With central banks hiking official rates around the world, it’s difficult to see the RBA doing anything less than a double hike in August.

“Borrowers knew rate hikes were coming but the size and pace of them has shocked households.

“Many families are already under the pump with skyrocketing grocery and petrol costs. Hefty increases to mortgage repayments, on top of this, could tip some into the red. 

“If you don’t think you’ll be able to make the monthly mortgage repayments in the coming months, take action now,” she said.

Inflation focus

Driving the unprecedented urgency if interest rates is inflation that is ravaging global economies, including Australia’s.

In response, over recent months the Reserve Bank Board has been withdrawing the extraordinary monetary policy stimulus that was put in place to support the Australian economy against the effects of the pandemic.

“As in many other countries, inflation in Australia has risen and it is now higher than it has been since the early 1990s,” Ms Bullock said.

“Global factors, such as COVID-19-related supply disruptions and Russia's invasion of Ukraine, account for much of this increase but domestic price pressures have also been building and, together, this has contributed to the highest rate of core inflation for many years.”

How Australia's inflation and cash rate compares to other countries

  Official rate – start of 2022 Official rate – today Last change Current inflation rate (p.a.)
Australia 0.10% 1.35% +0.50%, July 2022 5.1%
United States 0.00% - 0.25% 1.50% - 1.75% +0.75%, June 2022 9.1%
European Union
(Main refinancing options)
0.00% 0.00% -0.05% Dec 2015 8.6%
United Kingdom 0.25% 1.25% +0.25% June 9.1%
Canada 0.25% 2.50% +1.00%, July 2022 7.7%
New Zealand 0.75% 2.50% +0.50%, July 2022 7.3%
Japan -0.10% -0.10% -0.10%, Jan 2016 2.5%

Source: RateCity.com.au. Note: the ECB rates on the marginal lending facility and the deposit facility are 0.25% and -0.50% respectively.

The Federal Government Treasurer Jim Chalmers on Monday (18 July) said Australians should brace for “confronting news” about lower growth projections and higher inflation cutting into stalled wages.

“No credible economic forecaster in Australia thinks wages growth will keep up with inflation, and we will be revising up our expectations for inflation, and that will make the real wages situation worse before it gets better,” he said.

“Rising interest rates will have an impact on growth in the economy.”

The treasurer said the updated forecasts provided on 28 July “will be in many ways confronting – when it comes to our expectations of inflation, when it comes to the impact of interest rate rises on growth … [and] what this spike in inflation means for real wages”.

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