High excess savings rate has confounded the RBA's models and likely helped avoid a wider mortgage market downturn, ex staffers tell MNI.
Paul Ryan, senior economist at REA Group and a former housing market specialist at the RBA, said Australia had recorded arrears rates on average much lower than other western countries. The RBA would expect delinquencies, particularly among marginal households, to rise as the cash-rate increased, he said, noting the Reserve would likely want to know why arrears had not risen sooner.
Prime mortgage arrears rates were in line with the "soft-landing" outcome, he argued. "We’ve seen that in the unemployment rate too,” Ryan said. “Until we get up to the arrears rates where they were before the pandemic, so another 20 basis points or so, I don’t think anyone will be too concerned about the mortgage market.”
The major banks have recorded 90-day arrears rates between 0.5-0.75%.
Ryan noted the recent uptick in 30-day arrears, particularly among residential mortgage securitisations originated between 2020-21, was driven largely by unprepared mortgage holders rolling off artificially low fixed rates. “I suspect that the number of people who transition from 30-day to 90-day will be relatively low – we'll still get 90-day arrears increasing, but not at the same rate.”
John Hawkins, former RBA economist and professor of economics at the University of Canberra, noted the low arrears reflected the country’s mortgage origination regulations and the population’s strong prepayment mentality. “There are very few people who seem in really serious difficulty making their payments,” he added. “There's a lot of people having to cut back on spending but they don't seem at the point of defaulting on their loan.”
HIGH SAVINGS RATE
Stephen Anthony, chief economist at Macroeconomics Advisory and former fiscal and monetary policy advisor at the Australian Department of Finance and Commonwealth Treasury, noted Australia’s high savings rate had buffered the country’s mortgage holders from rate rises.
Australian households hold about AUD250 billion, or 11% of GDP, as excess savings – mostly unchanged since 1H 2022, according to the Australian Bureau of Statistics. The Reserve’s most recent Statement on Monetary Policy noted Australia’s household savings outstripped those of the U.S. and Germany, but had fallen over the last 12 months. (See chart)
High savings will continue to underpin growth over the next couple of years and complicate the RBA’s task, Anthony noted. Unlike the stimulus in response to the global financial crisis, which remained within the financial system, Covid-19 support had circulated more widely through businesses, high-wealth individuals and households, and added to inflation, he added.
The support, however, was not well-targeted to those in need and the excess savings were concentrated, he added. Higher interest rates would continue to punish marginal households, while excess savings would buffer higher earners, Anthony argued, calling for more coordination between monetary and fiscal policymakers to ensure the economic pain needed to pull inflation back to the RBA's 2-3% target was more equally spread.
PATH AHEAD
Ryan believes the Reserve’s next move will be to cut the cash rate, however, this will likely not happen until the Nov 4-5 meeting.
Anthony declined to comment on the RBA’s future strategy, but noted the high excess savings may not dissipate as Reserve and International Monetary Fund models suggest. “It would take a significant period of negative savings for that stock to draw down,” he added.
Hawkins argued the economy had performed as the RBA had expected, noting a cut will likely occur beyond Q3. “[CPI] is on a narrow path, but the [RBA] wouldn't want it to fall much slower,” he said. “At the moment, the [RBA] will probably be confident enough later in the year to decrease the interest rate.”