Despite many experts weighing in on the debate as to where rates and the economy is headed, there’s still varying opinions as to how – and when – things will play out.
Rather than adding to the noise on interest rates, we’re not going to add our own predictions here. Instead, we’re going to summarise the key thoughts and ideas being shared by leading economists, so you can get an idea of where things might be headed.
What can we expect for the rest of 2023?
Market commentators expect we’ll see the Australian economy continue to weaken, especially as we move towards the end of 2023. There are signs this is already happening. The latest figures released for May suggest inflation is easing, and household consumption is starting to decline.
But why are we only just starting to see changes in consumer spending now, after 12 interest rate rises?
First, there’s always a time lag between the rate hike and the actual change in mortgage repayment. Which means homeowners don’t often feel the effect of a rate rise until some months after the rate has actually increased. And until something impacts the bottom line, many don’t actually change their spending behaviour.
Even then, once the reality of having to pay higher mortgage repayments has kicked in, if you’re comfortably meeting these higher repayments, often nothing will change.
Have you changed your spending habits yet?!
As we’ve written about a few times now, there’s also large numbers of homeowners with fixed rate loans – some fixed at rates below 2%. According to the RBA, about 880,000 loans (or $350 billion) in fixed rates loans are due to expire towards the end of 2023. These borrowers haven’t felt the impact of interest rates increasing, and could be in for a shock when their fixed-rate term ends later this year.
We’re hoping these fixed-rate loan owners are taking measures now, to ensure they can manage their loans once they revert to variable rates. However, human nature tells us there are many homeowners who haven’t planned for this yet. This could also help to explain why consumer spending on the whole, hasn’t drastically reduced in line with rate hikes yet.
There’s also another important factor to consider here, which possibly speaks a little to how we even found ourselves here – in a seemingly never-ending series of rate rises.
It’s true the pandemic devastated many Australian families from an economic, social and wellbeing perspective. But it also left a whole lot of families financially better off, as it created somewhat of a perfect storm for well-paid homeowners to stockpile cash reserves.
As a result of low interest rates, reduced spending on living expenses (transport, entertainment, holidays and childcare for example) and government stimulus supporting the economy, the pandemic saw household savings accumulate at a rate like never before.
Whilst the rate of saving is starting to fall, ABS data indicates household savings levels are still considerably above normal levels. It’s these cash reserves that have supported strong household consumption over the last year, even as interest rates pushed upwards. Households are drawing upon these cash reserves to meet their increased living costs and mortgage repayments. And many believe it’s the speed at which these cash levels are depleted, that will impact the RBA’s cash rate decisions moving forward.
On a macro level, despite early signs that rates are starting to hurt the wallets of homeowners, the majority* are fairing ok with rising interest rates. Australia’s 30+ day mortgage arrears rate has increased, but it’s still low at below 1%.
*We know this is not the case for all homeowners. We know that many are struggling to make ends meet right now. And this is completely understandable given the financial pressures coming from all angles. We appreciate it’s not always possible to simply ‘cut back spending’ or ‘find additional hours of work’. We know this because on a daily basis we’re having conversations with homeowners about how tough it is to manage mortgage repayments right now. If you want to chat to us about your own situation, please reach out to our team. We here to help.
Credit card expenditure data released by a few of the major banks in recent weeks, suggests a broad-based decrease in discretionary spending. However, at the same time, data on the last 6mth deposit and offset account balances suggest there are still significant cash reserves to withstand further rate increases. The RBA is likely to take this into account, as they make their cash rate decisions.
Economists for the major banks suggest rates may increase slightly further, before stabilising and possibly declining shortly thereafter. It all depends on how widespread the financial instability is, because economic pain won’t be felt evenly across households.
What if you don’t own a home yet, but want to. How are rising rates impacting property sales?
Despite the sharp rate rises experienced in the last 13 months, Australians are still managing to buy property. Whilst increased rates have made it much more difficult to qualify for finance, the lack of available stock has helped to keep property prices relatively stable. (You can find out more on how a lender determines your ability to service a new loan here.)
According to Corelogic data as of May, Australian property listings were 20% below the previous decade monthly average. At the same time though, the ‘months of supply’ ratio (this ratio measures how long it takes to fully deplete stock, assuming the current rate of turnover holds) also fell – indicating that demand is still strong for the limited stock available.
Corelogic data also suggests there are changes in the type of properties being listed. New investor listings in May were only 2.9% lower that the previous decade monthly average. This means that whilst listings are down overall, investment properties now make up a greater proportion of the available sales stock. (Corelogic identifies Investment property listings as those with a rental history.)
Increasing numbers of investors are looking to offload their properties, which isn’t particularly surprising given that the rise in mortgage costs has typically outpaced rental growth.
However, with reduced numbers of owner occupier properties available, we may see increasing owner occupiers purchase previously tenanted homes.
Regardless of how it all plays out, we suggest you take a proactive approach to managing your home loans and take action before it’s too late to do anything.
If you want to find ways to reduce your monthly loan repayments, you can get started with a home loan review here.
