The Australians most at risk of mortgage stress as Reserve Bank interest rates keep rising

Australians who borrowed when Reserve Bank interest rates were still at a record low of 0.1 percent are most at risk of mortgage stress, with house prices expected to fall further Until September.

Monthly payments on an adjustable mortgage have risen 42 percent since May 2022, when the RBA kicked off the first of its nine rate hikes.

Westpac, ANZ and NAB expect three more hikes in March, April and May that would take the Reserve Bank’s cash rate to an 11-year high of 4.1 percent, from 3.35 percent today.

This means Australians with an average home loan of $600,000 see their monthly payments rise another $283 to $3,567, marking an increase of 54.7 per cent in just one year.

A Commonwealth Bank floating rate for May would rise to 5.92 percent, up from 5.17 percent now before the next rate hike, scheduled for March 7.

Just 10 months ago, Australia’s largest mortgage lender offered variable rates of just 2.29 percent for borrowers with a 20 percent deposit.

AMP Senior Economist Diana Mousina said borrowers who took out a loan between 2020 and early 2022, when RBA rates were at a record low of 0.1 percent, were at higher risk of mortgage stress when struggling to pay your bills.

‘These households have not had time to build up prepayment reserves, have faced large declines in home prices, have had very rapid appreciation in mortgage rates, are more likely to have obtained larger loans, and probably will not they were stress tested for the current rise in interest rates,’ he said.

Australian household debt also accounts for 189 percent of income, a level higher than Canada, the United Kingdom, the United States, Germany and New Zealand.

“This makes Australian households vulnerable to changes in house prices and interest rates, and the risk of mortgage stress increases as house prices fall and interest rates rise,” the company said. Mrs. Mousina.

Ms. Mousina argued that mortgage stress must be based on more than just who spent more than 30 percent of their income on mortgage payments.

He also looked at mortgage arrears, when a borrower is 30 days or more behind on their payments, along with negative equity, when someone owes their bank more than their home is worth.

Sydney has been the hardest-hit capital market, with median home prices falling 14.7% to $1,217,308 in the year to February 2023, CoreLogic data shows.

Hobart equivalent values ​​have plunged 12.2 percent to $699,959.

But expensive lifestyle ZIP codes on the north coast of New South Wales have suffered the biggest annual drops since floods hit the area in early 2022.

Mullumbimby’s median home price has plunged 30.1% to $1,011,547.

This was even more dramatic than Byron Bay’s 25.4 percent decline, which brought the median home price to $2,255,105.

Lismore suffered the worst of the devastation from the floods with the median home price falling 24.8 percent to $403,430.

Another flood-hit Brisbane suburb, Rocklea, saw its median home price fall by 13.3 percent to $507,506.

CoreLogic economist Kaytlin Ezzy said property prices in flood-prone Brisbane and northern NSW suburbs are likely to take longer to recover compared to the aftermath of the 2011 floods.

“Given the severity of this event and the short time period between major floods, it is likely that the decline in current value in the northern rivers and affected housing suburbs in Brisbane may be more durable,” it said.

AMP expects Australian home values ​​to continue to fall through September, marking a 15 to 20 per cent decline from peaks in 2022.

They have fallen 9 percent since peaking in April 2022, marking the biggest drop in CoreLogic records since 1980.

The Reserve Bank expects 880,000 fixed-rate mortgages to expire in 2023.

That means a borrower who got an average big bank fixed rate of 1.92 percent in May 2021 faces moving to a variable ‘reversal’ rate of 7.43 percent.

The fine print of these contracts stipulated that borrowers would move to a variable rate that was, on average, 3.33 percentage points above the RBA cash rate, and three of Australia’s four big banks expect a cash rate 4.1 percent for May.

That means a borrower with an average mortgage of $600,000, with a 25-year term, would go abruptly from paying $2,518 a month to $4,251, a massive 68.8 percent increase, RateCity calculated.

AMP chief economist Shane Oliver said a higher RBA cash rate of 4.1 per cent could push Australia into recession as more home borrowers struggle to pay their mortgage, leading to falls in house prices.

“The growing risk of recession with much higher unemployment will weigh on demand with the risk that debt service problems for some homeowners will start to boost supply as well,” he said.

Australia’s gross domestic product grew 0.5 percent in the December quarter, but GDP per capita, or the economic output of each individual, held steady, national accounts data from the Australian Bureau of Statistics showed. Australia.

Gareth Aird, head of Australian economics at the Commonwealth Bank, said the economy was likely to hit a per capita recession in 2023, despite the return of migrants.

A per capita recession is different from a technical recession, defined as two consecutive quarters of GDP contraction.

Australia last suffered a technical recession, as a result of high interest rates, in 1991.