The evidence is piling up that interest rate hikes are biting. Westpacโs measure of consumer sentiment is so gloomy itโs at levels seen in past recessions, house prices are tumbling, and a swag of retailers have recently posted weak results.
Itโs long been feared that under this sort of pressure, Australiaโs highly indebted households could break, and drag down the economy with them. So how serious are the cracks that are starting to appear in the household sector, which is seen as the economyโs engine room?
Over the past fortnight, weโve been given a good indication of how millions of households and businesses are coping, as the biggest banks have lifted their bonnets to the market.
The numbers revealed a mixed picture. The vast majority of people are managing their repayments โ indeed, some economists say households as a whole have been surprisingly resilient. But against this, a small but growing minority is struggling, and thatโs happening when we still havenโt felt the full economic effects of this yearโs rate hikes.
In reported results this month, National Australia Bank, Westpac, ANZ and Commonwealth Bank have all recorded a recent increase in the proportion of Australian borrowers who had fallen more than 90 days behind on their mortgage payments (known as being โin arrearsโ) by September 30. The number of borrowers who are behind is still fairly low overall, but experts expect mortgage arrears rates to increase.
There are a few reasons for this. One is the time it takes for rate rises to inflict pain on household budgets.
Since September 30, when the banks ruled off their books, weโve had two more interest rate rises announced by the Reserve Bank, and it generally takes a month or two for banks to raise the actual repayments that customers make.
Beyond this, there is a sizeable group of people who will not have seen much of an increase in their monthly repayments from the rate rises from earlier this year, but who are likely to see a bigger increase in their repayments this time around.
Why? Because when the RBA was cutting rates last year, three of our five biggest banks did not automatically lower their customersโ repayments.
As a result, most of these banksโ customers simply kept their payments unchanged. This meant these people were paying off their loans ahead of schedule, giving them a โbufferโ that meant their monthly mortgage payments didnโt need to rise earlier this year when the RBA raised rates. After the latest increases, thatโs likely to change.
โThe first three hikes that we had basically reversed what was cut last year, so many people were still paying the same amount,โ Opal Capital chief investment officer Omkar Joshi said. โAfter the latest two hikes, people are actually going to have to pay more.โ
Thatโs the mechanical reason why these latest hikes could hit harder โ but thereโs also a wider economic reason why it takes a long time for interest rate hikes to really bite.
Moving interest rates takes a long time to affect the economy because it leads to gradual changes in behaviour by millions of households and businesses.
Once mortgage payments rise, households will still take a while to decide where to cut their spending if needed, while businesses will try many other things to cut costs or improve their performance before resorting to cutting jobs.
On this note, updates from two of the banks โ ANZ and National Australia Bank โ suggested small business borrowers in particular were struggling with their repayments on home loans.
NAB, the countryโs biggest business lender, said the group of mortgage customers were struggling to manage their debts was โheavily skewedโ to loans where the borrower relied on income from a business, instead of a loan.
Barrenjoey analyst Jonathan Mott said all banks would face a tougher โcredit environmentโ, which means he believes more people will struggle to repay their loans. He also pointed to the risk of future job cuts by those businesses who are struggling with debt.
โBoth ANZ and NAB stated the rise in delinquencies was weighted to business ownersโ mortgages, and if a business owner must decide between losing their own house or laying off staff, we all know what they have to do,โ Mott said.
Meanwhile, Jarden analyst Matthew Wilson argued NAB would be โfront and centreโ in a credit cycle, pointing to the bankโs higher proportion of business and corporate customers. โNABโs canary appears to be deeper into the proverbial coal mine and it may have stopped singing,โ Wilson said.
Importantly, mortgage arrears rates overall are still fairly low, and there are plenty of households who donโt feel much pain at all when interest rates rise. Some even benefit.
Most obviously, people who have no debt and money in the bank receive higher interest payments when interest rates rise. Deutsche Bank macro strategist Lachlan Dynan recently suggested rate rises might have lost some of their โpotencyโ because of the strong growth in household assets such as bank deposits and funds held in superannuation accounts.
Perversely, however, if interest rates are indeed losing some of their potency, this could just encourage the Reserve Bank to hike even more aggressively than it would have in the past, to get the desired slowdown in spending. The RBAโs hope is that a slowdown in spending eventually leads to lower inflation because it makes businesses less inclined to raise prices.
Reserve Bank governor Michele Bullock has justified the latest rate hike by saying the alternative โ unchecked inflation โ would ultimately be even worse because that would mean more people would lose their jobs.
โSome pain now will prevent even worse pain down the track,โ Bullock said this month.
Thatโs the unpleasant truth about using interest rates to target inflation, as more households are likely to find out in months ahead.
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Clancy Yeates is deputy business editor. He has covered banking and financial services, and was previously national business correspondent in the Canberra bureau.Connect via X or email.From our partners
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