MNI POLICY: RBA Sees Savings, Jobs Cushioning Mortgage Stress

The Reserve Bank of Australia calculates accumulated savings, a tight jobs market and spending cuts will make higher interest rates manageable for most homeowners, as AUD400 billion of fixed rate mortgages mature in 2023 and home prices are set to add to eight straight months of declines, MNI understands.

The full impact of the cumulative 300bps of tightening since May will become evident over coming months as higher cash rates are passed through to variable-rate mortgages, but a particular focus is on borrowers who fixed rates at historic lows and will confront a significant increase in repayments as the bulk of pandemic-era fixed rate deals mature this year. Fixed-rate mortgages peaked at around 40% of all home loans in early 2022.

Policymakers take some comfort from the fact that borrowers would have been assessed to handle rates 250-300bps higher than the historic lows during the pandemic, with the Australian Prudential Regulation Authority raising the buffer to 300bps in October 2021. That many borrowers do not borrow the full amount they qualify for is also a positive.

The RBA has calculated that 60% of fixed rate borrowers would suffer a 40% increase in payments if the cash rate were to rise by 350bps by the end of 2023. However, overnight indexed swaps point to a peak cash rate of close to 3.9% in late 2023, around 380bps higher than the 0.1% low last seen in May. The RBA's next meeting is on Feb 7. (See MNI RBA WATCH: RBA Hikes By 25bps, February Increase On Radar)

SAVINGS BUFFERS

Greater clarity is needed on the accumulation of buffers by fixed-rate borrowers outside of their mortgages. A share of the AUD250 billion of savings built up during the pandemic has been directed to offset accounts, which minimise interest payable on variable-rate mortgages, though are not available on fixed-rate loans. The household savings ratio fell to 6.9% in Q3, down from 8.3% in Q2, and returned to pre-pandemic levels.

While the labour market remains tight and wages are rising, household budgets will be pressured by both higher mortgage payments and elevated inflation. Modelling in November's Financial Stability Review showed a 100bp increase in the cash rate from October's level - then 2.6% - would result in 15% of variable-rate mortgage holders households enduring negative cashflows, which would require them to tap savings or cut back on living expenses.

The increasing squeeze on household finances comes as house prices continue to retreat. CoreLogic's Home Value Index, released Tuesday, showed prices fell 1.1% in December, with prices down 8.2% since their peak on May 7. House prices fell 5.3% over 2022, marking the first time since 2018 that national home values fell in a calendar year. RBA Governor Philip Lowe said in September that he wouldn't be surprised if house prices slipped 10% (See MNI BRIEF: RBA's Lowe Says 25bps And 50bps On Table In October).