One million Australian home borrowers could be cash flow negative by the end of 2023, even if interest rates don’t rise again and mortgage delinquencies continue to rise.
The Reserve Bank of Australia on Tuesday left cash rates unchanged at an 11-year high of 4.1 percent, the first break since April.
But Governor Philip Lowe hinted at more monetary policy tightening because inflation is still too high even after the most aggressive rate hikes since 1989.
The RBA’s own financial stability assessment, in April, estimated that 15 percent of borrowers would have “negative excess cash flow” this year if their mortgage payments and essential living expenses exceeded their after-tax income.
This ‘baseline scenario’ was expected to occur ‘by the end of 2023’, when immigration would already be at record levels.
AMP chief economist Shane Oliver said this would likely mean a million borrowers would be in severe mortgage stress by Christmas because the RBA modeling was based on a 3.75 percent spot interest rate “and we’re well past this now.”
“We are now seeing increasing evidence that rate hikes are corrosive,” he said.
One million Australian home borrowers could have negative cash flow by the end of 2023, even if interest rates don’t rise again (pictured is an auction at Melbourne’s Glen Iris)
Credit rating agency Moody’s Investors Service revealed Wednesday that mortgage delinquencies, where borrowers are 30 days or more behind on their payments, had risen in the March quarter.
Arrears rates increased for loans from major banks and non-bank lenders.
Analysts Helen Liu and Alena Chen said borrowers who have only recently taken out a home loan are most at risk.
“We expect delinquencies to continue to increase over the next 12 months due to high interest rates and inflation,” they said.
“Borrowers who took out mortgages at very low interest rates in the few years before the Reserve Bank of Australia entered its monetary tightening cycle pose a particular risk.”
A borrower with an average $600,000 mortgage, who stayed on a variable rate, would pay $17,556 more per year in principal payments than they did 14 months ago.
The Reserve Bank of Australia on Tuesday left cash rates unchanged at an 11-year high of 4.1 percent, the first break since April
Monthly repayments are up 63 percent to $3,769, up from $2,306, while a Commonwealth Bank floating rate for a borrower with a 20 percent down payment rose from 2.29 percent to 6.44 percent.
The Reserve Bank is bracing for 880,000 fixed-rate mortgages due in 2023, with some borrowers facing an abrupt 88 percent increase in their monthly repayments.
RateCity revealed that borrowers who lock in their mortgages for two years in 2021, at a low rate of 1.92 percent, will be forced into a standard variable rate of 7.68 percent unless they can refinance.
That’s because the fine print at the time generally said borrowers would move to a “repayment rate” that was 3.33 percentage points higher than the RBA cash rate when it was at a record low of 0.1 percent.
Economists now expect at least another 25 basis point rate hike that would bring rates to 4.35 percent, with May’s inflation rate of 5.6 percent still well above the RBA target of 2 to 3 percent.
The Reserve Bank’s own financial stability analysis, in April, estimated that 15 percent of borrowers would have “negative reserve cash flow” this year if their mortgage payments and essential living expenses exceeded their after-tax income (pictured shows Governor Philip Lowe with his deputy Michele Bullock)
The surge in loan repayments for borrowers moving away from fixed rates was expected to erode savings buffers built up during the 2020 and 2021 lockdowns.
“These protections are probably now waning, especially with many fixed rate mortgages now reverting to mortgage rates two to three times higher than their original fixed rate,” said Dr. Oliver.
Dr. Oliver said there was now a high risk of a recession due to RBA rates rising at their most aggressive pace since 1989.
“Due to the continued rate hikes, we see the risk of a recession in the coming year as very high at around 50 percent,” he said.
A recession is looming as the Treasury predicts a record 400,000 new migrants will move to Australia in 2022-2023, based on arrivals minus permanent departures.
Over a five-year period, 1.5 million new migrants are expected to arrive in Australia by the end of June 2027.
Net overseas migration reached a record 387,000 last year, with Australia having a national rental vacancy rate of just 1.2 percent in May, figures from SQM Research revealed.
Despite the rate hikes, Sydney’s median house price rose 2 percent last month to an even more prohibitive $1.324 million, while Brisbane’s median price rose 1.3 percent to $806,781, data from CoreLogic showed.
Australia’s population growth rate of 1.9 percent last year was dwarfed only by Canada’s 2.7 percent increase and Singapore’s 3.4 percent increase, among first world nations.
AMP chief economist Shane Oliver said there was a high chance of a recession, meaning the government would have to cut immigration to deal with the housing crisis (pictured is Sydney’s Wynyard train station)
But dr. Oliver said a recession would most likely push back immigration, so strong population growth – based on a surge in international students and skilled migrants – did not add to the housing stress during an economic contraction.
“If the economy goes into recession, it is likely that the government will reduce immigration intake, further reducing the underlying imbalance between supply and demand,” he said.
The Australian government drastically cut immigration in 1991, the last time aggressive interest rate rises had led to a recession.
The net overseas migration level in 1990 was 124,700, but a year later it was reduced to 86,500, as unemployment rose into double digits even after the 1991 recession was over.
Immigration was again reduced to 68,600 in 1992 by Paul Keating’s Labor government as unemployment reached 11.2 per cent in December of that year – the highest level since the Great Depression of the 1930s.
Australia’s immigration was reduced again to just 30,100 in 1993 with an unemployment rate of 11 percent, nearly triple the current unemployment rate of 3.6 percent, while the RBA expects it to reach 4.5 percent by the end of 2024.