Banks expect more mortgage holders to fall behind on payments as households struggle with higher interest rates and inflation.
Paul Ryan, senior economist at REA Group, says this week’s labour force figures have the potential to “change the RBA’s mind” on interest rates. “I think the labour force figures this week, coupled with the quarterly CPI coming out next week, have the potential to be something that could change the RBA’s mind on interest rates,” Ryan told Sky News Australia. “We expect employment growth to continue at a slower pace – that’s been the trend this year.” In partnership with realestate.com.au.
The Reserve Bank of Australia’s July bulletin, released on Thursday, showed that new home buyers, borrowers who took out loans when interest rates were at record lows, and highly leveraged mortgage holders on low incomes are most at risk of defaulting on their repayments.
The average landlord rate rose from 2.52 per cent per annum in May 2022 to 4.98 per cent in January 2023, and 6.27 per cent as of May 2024, according to Savings.com.au.
Borrowers with loans with a debt-to-value ratio of 80 or more were most at risk of default, with delinquency rates at their highest and fastest rising.
“This largely reflects their smaller reserves, which make them less resilient to changes in their mortgage payments or balance sheets,” the article said.
Photo: Newswire/Gaye Gerard
Borrowers with older loans were more likely to default, with the RBA reporting that a loan aged five years was “about twice as likely to default as a loan aged two years on average”.
“This is consistent with our understanding that arrears increase over time since a loan origination, but borrowers’ circumstances do not tend to change quickly,” the company said in a statement.
A small but growing group of households also appear to be struggling, with the RBA bulletin noting that financial difficulty notices have “increased significantly since 2022”.
However, the bulletin said that while it expected budget pressures to continue, it would be relieved once inflation moderated.
“Looking ahead, household budget pressures are expected to remain elevated for some time, but will ease slightly as inflation slows further,” the fund added.
“The expected gradual loosening of the labor market will be a challenge for families who will lose their jobs.
“Banks expect home loan arrears rates to rise slightly, but remain relatively low compared to history, based in part on their latest assessments of the economic outlook.”
The Reserve Bank is due to meet again in early August to consider its next move on the official interest rate. Photo: News Agency
The current cash rate has been at 4.35 per cent since November 2023, with all eyes on June quarterly inflation figures which could determine whether interest rates rise when the RBA board meets on August 6.
Concerns about a third-quarter interest rate hike grew after the consumer price index rose 1% to 3.6%, remaining firmly above the Reserve Bank of Australia’s target range of 2% to 3%.
In June, Reserve Bank of Australia Governor Michelle Bullock said Australia was “walking the narrow path” and refused to rule anything out.
“We can basically stay, pretty much where we are: not ruling on anything, not ruling anything out,” she said in the Senate estimates.
“But if, for example, it turns out that inflation starts to rise again or becomes more difficult than we think we can bring down, we will not hesitate to move and raise interest rates again.”
However, Ms Bullock said the RBA would move to cut interest rates if growth came in lower than expected.
“If the economy turns out to be much weaker than expected, and that puts further downward pressure on inflation, then we will look to ease,” she said.
