How households will react to interest rate rises

Cross posted from Digital Finance Analytics

by Peter North

We have updated our analysis of how sensitive households with an owner occupied mortgage are to an interest rate rise, using data from our household surveys. This is important because we now expect mortgage rates to rise over the next few months, as higher funding costs and competitive dynamics come into pay, and as regulators bear down on lending standards.

To complete this analysis we examine how much headroom households have to rising rates, taking account of their income, size of mortgage, whether they have paid ahead, and other financial commitments. We then run scenarios across the data, until they trip the mortgage stress threshold.

At this level, they will be in difficulty.  The chart shows the relative distribution of borrowing households, by number. So, around 20% would have difficulty with even a rise of less than 0.5%, whilst an additional 4% would be troubled by a rise between 0.5% and 1%, and so on. Around 35% could cope with even a full 7% rise.

1

If we overlay our household segments, we find that young growing families and young affluent households are most exposed to a small rate rise. However, some in other segments are also at risk.

2

 

State analysis highlights that households in NSW are most sensitive, a combination of larger volumes of loans as well a larger loans, relative to incomes resulting is less headroom.

3
Younger households are relatively more exposed, because their incomes tend to be more limited and are not growing in real terms relative to mortgage repayments.

4
Analysis by DFA property segment shows that whilst some first time buyers are exposed at low rate movements, those holding a mortgage with no plans to change their properties (holders) are also exposed. In addition, some seeking to refinance are doing so in the hope of reducing payments, because they have limited headroom.

5

Finally we turn to other insights from our data. First, those households who sourced their mortgage via a mortgage broker are more likely to be in difficulty with a small rate rise, compared with those who went direct to a bank. This, once again, shows third party loans are more risky. This perhaps is connected to the types of people using brokers, as well as the broker’s ability to suggest lenders with more generous underwriting standards and coaching on how to apply successfully.

We also see that rate seekers (we call these soloists) who are driven primarily by best rates, are more sensitive to small rate rises, compared with those who are more inclined to seek advice, and appreciate service more than price (we call these delegators).

6
Soloists who went via a broker are the most exposed should rates rise even a little, whereas delegators going to a bank, are more able to handle future rises.

Segmentation, effectively applied can results in quite different portfolio outcomes!

Comments

  1. Realising that this current rates are a historical abnormality, most households have borrowed prudently. They have taken advantage of the low rates while leaving breathing space within their budgets for when they rise again.
    And in other news, iron-ore remains at $120 a tonne for the 60th month in a row, and Australian IT is booming with all of the workers from car manufacturing having been successfully retrained as computer programmers, specialising in AI.

  2. I wonder how many owner occupied peeps have used equity in their home to buy an investment property? Greater than 50% I’d say.

    • And also the 100K+ Audi,Porsche,BMW,Mercedes, Jeep that will be coming out of warranty and will need a 10K chip for the super duper 8 speed gearbox…

      • Mining BoganMEMBER

        I’ve always been a car nut. Would talk for hours about working on them with mates. Just loved them. Hooligan cars, everday drivers, bush bashing. The lot. Then the boom came…

        My fellow bogans started talking luxury 4wds instead of recovery gear. About getting away instead of actually getting away. I know a 4wd owner’s group who all own vehicles that have never seen dirt. Doesn’t stop them from talking about it but.

        I still love cars. It’s just that there’s nobody left to talk to about them. The car makers should get together and release one ultimate luxury vehicle. Call it the Colossal Wank. Something to mark the zenith of stupidity.

        Betcha though that my fellow bogans would speak proudly of the Colossal in the shed.

      • Mining BoganMEMBER

        Ta. That’ll do me nicely. Probably my day gone though and I have to replace the chain and sprockets on the bike.

        My fellow bogans stjll do this but the conversation isn’t about the old car anymore. It’s about how much it’ll be worth when finished…and probably never driven. Makes me sad.

      • I live in working class area in Sydney (if you can still call it Sydney) and I am absolutely sure there are more mercs and audis here than in Manly. When I go for my walk (5km) I can only see 3 older vehicles parked in front of couple of houses. Every house has new or new new cars parked in the driveways.

      • @MiningBogan – I was in Melbourne’s Brighton recently over Christmas since my mum lives in Caulfield. It was the day of the flash flooding. The streets were completely flooded in parts. I was in my mum’s car (new Mazda 3) so I couldn’t go through the big puddles in 1 section of Hawthorn Road.. The Tram was stranded also at the depot because of it. But behind me was this big Land Rover, he also avoided driving through it, and for the life of me I can’t understand why? I mean that car is designed for shit like that. It would have sailed through literally, but he was a big pussy cat in his flash car. I said to my partner, why on earth did he buy that car? If I had my Suzuki Jimny I would have given it a go in 4×4 mode haha.

      • Indeed , when one sees all those milf’s driving around in their colossal wanks and colossal tattooed wankers driving around usually in hi vis shirts I wonder at who is paying for all of this…then I realise it has to be the “service economy customers, ” using the overpriced trades people, traffic control companies, paint your roof n driveway, landscapers, etc and I come to the conclusion that the snake is now devouring itself… Was looking at pictures from last weeks Summer Nats in Canberra and also wondered how are they paying for all those car mods, burnout tyres, beer,accomodation, tatts, ?

      • Reynmon, not sure if you saw any camping grounds over the summer break, brand new utes paired with brand new caravans which combined must cost + $100k. Equity mate I guess or tax write off through their business.

      • It’s only once the Sheriff turns up that you find out who’s been driving naked.

        The finance deals offered on some of these EU cars make novated leasing look damn expensive e.g. Audi 1%. Then there’s equity mate and between these and the weekend BBQ, keep up with the Jones’ pissing contest it’s easy to see how we arrived here. Welcome to the excesses of the late 80s, on steroids.

      • Here’s an anecdote MB will enjoy.

        I was in Aldi buying some rechargeable batteries last week, and lined up behind a reasonably well-dressed woman obviously doing the grocery shopping.

        She gets to the counter and tells the checkout chick “stop when you get to $45”. Inevitably, she’s got more than $45 worth of stuff (not a lot more) so has to do a bit of shuffling to get the things she needs vs wants (unfortunately I wasn’t paying enough attention at that point to see what made the “needs” pile). Counts out her $45 (including a LOT of coins, which was what got my attention) and goes on her way.

        When I walk outside, she’s loading her $45 worth of groceries she apparently raided the kids piggy banks to buy into an AMG A45 Merc worth (at least) 80 grand.

        I’m hoping these people who are comically overstretched have to start letting their flash cars go soonish. We’ll probably need another bigger vehicle in a year or two when the kids get old enough to need bikes and things carted around and it’d be good to see car prices start resembling what they are in most other countries.

      • One thing we can bet on. there will be a lot of cheap second hand luxury cars coming onto the market.

      • @Gramus: “One thing we can bet on. there will be a lot of cheap second hand luxury cars coming onto the market.”
        i was thinking exactly the same thing. i have noticed luxury cars on the road spewing black exhaust. it’s like, these people dont have the money to maintain them properly (even newer toyotas etc). i would be careful buying without getting it checked out by a good mechanic of course.

      • They’re almost all on novated leases, and they include (require?) regular services in the package.

        So long as you only look at cars about 3 years old coming off lease, should be OK.

      • @MB last year I went on a bush bashing vacation with several friends, I took my somewhat old but always faithful Troopy, one friend took a one year old Diesel Prado it was his pride and joy. The guy spent the first week telling me about all the wonders of this new 2.8l Turbo Diesel and what Euro 5 compliance means, and why I should consider this, all I can think is, since when were Greenies allowed on a bush bashing vacation? Ok so we’re a week into this get away when an Engine warning light comes on bit of reading and we discover it’s the DPF (Diesel Particulate Filter) warning, bit more reading and we discover that he should drive the car for about 30 min at freeway speeds…needless to say we both simultaneously said wtf how can we do that? OK so guess we should just ignore the warning …nope. about 3 days later the car goes into Limp mode, so we’re miles from anywhere in some very difficult terrain and needing to snatch strap and winch that POS Prado over everything that even looked like an obstacle meanwhile my Troopy just keeps on humming never missing a beat. Needless to say whatever grief I got on that first week was repaid in spades. Honestly what’s the point of an off road car that goes into limp mode the first time you take it off road.

      • Locus of ControlMEMBER

        Blimmin’ heck, drsmithy, that’s one doozy of a story. It really says something about society when people prioritise their esteem needs (must be seen in a ‘flash’ car) ahead of their basic needs (food, shelter, etc.).

      • Ok so we’re a week into this get away when an Engine warning light comes on bit of reading and we discover it’s the DPF (Diesel Particulate Filter) warning, bit more reading and we discover that he should drive the car for about 30 min at freeway speeds…needless to say we both simultaneously said wtf how can we do that?

        Would running the engine at a suitably high constant RPM for the same time achieve the same effect ?

      • Would running the engine at a suitably high constant RPM for the same time achieve the same effect ?
        That’s what we thought, however it was rocky tough terrain so the big advantage of the Turbo Diesel is it’s high torque and that’s Torque is hard to use when your reving the engine because all the gear ratios are kinda wrong. Anyway according to the information that we had available to us at the time the DPF should not have clogged up since the engine was properly warmed up and not just used for 5 min trips (which is apparently what clogs a DPF). That makes a DPF a useless add on if you ask me, unfortunately once the cars emissions control decided that the DPF was clogged it didn’t give us any choice there was no override we were stuck in limp mode until we got to an Authorized Toyota service spot (and they wanted to charge him for the DPF service suggesting that it was his fault for inappropriate driving and ignoring the DPF warning. If I needed a reason to hang onto to my Troopy than this was it.

      • My Falcon, 10 years old, on gas is worth nothing on the market. In another 10 years time I will agree that it is worth nothing. I hope by then we have dial-a-self-drive-car and dont have to buy one…
        As for $100k 4WD’s, there is a private school near to where I live which calls itself an ‘eco’ school. Slightly out in the bush by about 2km’s, 90% of the kids get driven to this school in 4WD’s and the rest in Audi/BMW/Mercs. I suspect many of these people are the ‘on the edge’ type when it comes to being sensitive to interest rates or salary issues.

    • Data to back this up? Or does it just fit your narrative/biases?

      All my peers and family members are madly paying their mortgages off.

      We used these low rates to refinance sub 3.7% fixed/variable split fixed 3.68 2 years and have some head room and are madly paying loan off.

      • 2 years? Friend, will your house be paid of by 2019? Because what is being said here is that low low rate you have could be half times/double that by 2020.

      • However its what happens at the margins. Sensible people dont count. I 10% collapse then it will be a bankers catastrophe.

  3. The Penske FileMEMBER

    Third party loans are more risky? I think the link above is just a cheap shot and see the comments below of where the data comes from (sorry, no italics). What a load of crap.
    Banks declare that their broker books are the same or better than their retail books when talking to the broker market.
    When rates do rise broker will be best placed to assist clients that can be helped so I think their books will turn out stronger than a bank book. What’s a retail branch going to do when a borrower puts up their hand? At least a broker may have an option and even an explanation as to why rates rise etc. for the customer to know where they are at. Are there bad brokers that fudge the figures? yes. Are there bad bankers that fudge the figures? yes. Move on.
    Of course I agree that a lot of people have over borrowed and therefore will sink anyway. I just feel that the link stated is from a source who rings how many homes?

    ozmaver says:

    March 2, 2016 at 2:55 pm

    I’d like to know where you got your data from please?
    All of the major banks call on us as we are actively involved in the collection process, a broker is totally dependent on financially secure customers, trail income only works on a long-term perspective.
    Uniformly we are shown reports on our loan books and told overall the “broker book” is “cleaner” than branch originated loans.
    Yes there are vastly different lending guidelines between broker and branch, its the common reason given by the bank BDM’s for the clean broker book, broker loans have harder criteria to pass to get approved. This is one of the reasons the oft-cited debacle at Moranbah is quoted, few brokers could process one even if they wanted to as it was well know the “boom” would draw to a close. I was working in Suncorp in lending and was astounded at the loans written by branches.

    Log in to Reply

    Martin North says:

    March 2, 2016 at 3:48 pm

    The data comes for the rolling household surveys which we run – so direct from households. As part of the conversation we ask about their financial footprint. We then calculate the LVR and LTI. We also mark to market the property. So a large and robust dataset, which takes a whole of market view. As I said in the blog, I suspect the differences are more driven by different customer needs; and I am not anti-broker. The best of the do a great service.

    • Yawn. What is this, the credulity hour?

      ” At least a broker may have an option and even an explanation as to why rates rise etc.”

      Option = extend and pretend.
      Explanation = lolololol

      “broker is totally dependent on financially secure customers, trail income only works on a long-term perspective” – yes, because mortgage broking is carried out by mature gentlemen with a sedate long term perspective, not failed real-estate agents or taxi drivers or pimply 17 year olds!

      • The Penske FileMEMBER

        Yes and no Peachy. Trust me there are very ordinary brokers out there particularly in the prime home loan space and I had the pleasure of assisting in having a couple flicked from the industry last year but there’s incompetence in the retail space as well. That’s my point.
        Your broker experiences must of been ordinary in the past. Let me guess… Aussie?

    • Ronin8317MEMBER

      The property forums says otherwise. People use a broker when the banks refuse to lend as much.

    • It makes sense that 3rd party loans are more risky. Any one bank can only accept you or reject you according to their credit rules. Thats the end of the path.
      A mortgage broker is going to shop around for someone that is willing to offer credit.

      Then there is also the fact that the major’s generally aren’t known for being the most generous. Mortgage Brokers play a much larger part/only role in writing mortgages for a lot of the smaller banks/non-bank institutions.

  4. So if mortgage rates were to rise back to what they were in the pre-GFC years, between a third and a half of all borrowers would be in trouble?

    We’re not a big income earning household but our debt is tiny by modern standards and we could weather rates rising back to 7% or 8% – but it appears that just a couple of percent rise could suck enough spending out of the economy via increasing household interest payment to trigger a recession in this lacklustre economy.

    • Debt, the quantum of it and the servicing of it at any interest rate, has already sucked spending out of the economy – on a global basis, it’s just that those who think they have things under control fail to recognise that ( or if they do, they don’t want to!). Only lower prices-of-everything is going to help spending at the same time as holding debt static/or repaying it. But that will knacker The System. There is no hope of a soft landing left…..

      • Agree Janet, debt has already sucked the life out of everything. But it’s been offset (to some degree) thus far as you say…….but since it looks like we may have reached the floor of how low rates can fall here, where to now that we can’t make borrowing any cheaper?

        Tis a tad worrying.

      • bolstroodMEMBER

        Spot on Janet,
        Only now is it starting to dawn on many people how destructive the debt devil is.
        The future , from whence our debt comes has beeen hollowed out ,mined and fracked for our present lifestyles.
        The interest payments comes out of todays wages leaving very little for discretionary spending. Add an interest hike or two and the wheels are going to come off.
        I was lucky to have parents and grand parents who lived through the great Depression and who drilled into my brothers and I the debt lessons.

      • @Bolstrood Why do you believe that you will benefit if/when the debt system collapses? Not looking for an argument just genuinely curious.
        As I see it there’ll be very few that benefit, however it’ll probably be those that are towards the middle of the debt pile that benefit the most. I kinda see a system evolving that extracts a pound of flesh from the bottom 5% (maybe 10%) of the market but quickly creates policies that contain the collapse and thereby indirectly benefit the rest of the debt slaves. Unfortunately nobody but nobody cares about the non debt slaves…this kinda points towards the emergence of policies that’ll either directly or indirectly relieve you of your accumulated “savings”…..I’m a big believer that at some point we’ll all start to question the so called “supremacy of savings” in a way Steve Keen is leading the pack by proposing a Private debt for Public debt swap…How does the NO debt person profit from this swap, maybe they receive a bank credit but will this match the asset revaluations that everyone else has accumulated …I doubt it.

      • The lower (interest rate) bound is what is exercising the minds of various economic quacks who are influential at policy level … and the abolition of cash is central to breaching the lower bound.

        Funny how so few people have questioned why so many establishment economists have turned their minds to crime-fighting all of a sudden: must get rid of cash to prevent tax-evasion, corruption and general criminal activity etc. The ultimate red herring.

        Once cash is banished, all money will be digital and trapped in the system – free to be taxed by -5% rates. What lower bound?

    • “but it appears that just a couple of percent rise could suck enough spending out of the economy via increasing household interest payment to trigger a recession in this lacklustre economy.”
      Yes! The analysis assumes a constant economy as rates rise. It ain’t gonna happen that way!

    • Yeah this is the point.

      Almost half of all Australian employment is via small businesses (2014 – would be way larger now post mining) and of these something like 80% are backed by mortgages on their residential property.

      The entire economy is leveraged from housing.

      Now take out 20% of the spending. How are those businesses going to respond ?

      A two or three percentage points interest rate rise will absolutely wipe out those 7%.

      There are much wider considerations not being put into place – the first question might be how much will a 2% rate rise impact you – the second question should always be and how much will a 2% reduction in take home pay at the same time impact you.

      .

      • David… Yes – or a total loss of employment!!
        The hit, when it comes, will not be spread evenly across all people. The powerful, be it lawyers, waterside workers or government employees, will get themselves compensated. Small businesses and their employees will bear much of the brunt as well as other less well connected members of society.

      • TailorTrashMEMBER

        Got a pop up ad yesterday on my iPad pushing Uber driving as a way to get money to do house renovation ……..I thought that encapsulates the Australian situation more perfectly than anything I have read in a long time ……..

      • TT “Will robot Uber drivers be the next driver of Australian property prices? Boom times ahead. “-Andrew “Doc” Wilson

    • There is absolutely ZERO fear amongst borrowers, because they’ve been conditioned to believe rates will never go up. New normal. Haven’t seen a recession, ever!

      Friends of ours tell us they were within a whisker of having the house repossessed after he lost his job a few months back. A week later there’s Facebook posts at the expensive concerts, Spring Racing Carnival with the new outfits, hair and then the holidays. This won’t register with people until it is forcibly removed from them by the banks, sheriffs etc. Till then, she’ll be right mate.

    • That this country hasn’t has a recession in ~25 years… No one under 40 in this country was paying any bills or in the labor force during the last one. They don’t know what one is. What is coming is going to be a societal shock of mammoth proportions.

      I’m stunned at the figure that 20% will be trouble with a rise of UNDER 1%…..

  5. Low rates are needed in order to pay off the massive debt burden the private sector has accrued. Of course the irony is that lowering rates has simply led to ever balloooning debt rather than people actually paying it down though this is probably an artefact of relaxed lending standards over the past couple of decades which has seen private debt accelerate to stratospheric levels. We had to virtually scrape and bow to every lender in the place before one finally agreed to extend us a loan of a size that would be quite trivial by today’s standards – no bad credit, two full time secure coalface of service delivery jobs that don’t dry up during recessions……lending standards seemed rather tougher circa 1999! But just a few years later it seemed as though the banks were literally throwing money at anybody with a heartbeat.

    And so now here we are……..

    • “artefact of relaxed lending standards over the past couple of decades which has seen private debt accelerate to stratospheric levels.”
      Nope – it’s a logical outcome. It laughable how it has been argued, especially in MB, that lower rates would lead to decreased debt. If you reduce the price you get more demand! Simple! This can be distorted in the short term but we’ve had negative RAT rates pretty much consistently for 50 years that I’m aware of – and some wonder why we have a mountain of debt?

      • That may be true but household debt has only really ballooned over the last 20 years or so, so something else must be at play as well.

      • dr smithy
        Yes I should have said that I fundamentally agree – the so-called keating reforms really set this thing running. Prior to that it was on a somewhat tighter rein but the pressures of an already distorted economy meant that they either had to set it loose or make some very very difficult financial and fiscal decisions – which were near impossible even then.

      • Matthew I think it suited them all…extend and pretend past their own period of government of if you are head of Treasury or RBA – past your appointment and into over-paid retirement as a well paid Director/of public companies.
        It requires a level of hubris we mere mortals cannot begin to comprehend.

      • I agree with Dr Smithy – something appears to have changed dramatically over the past 20 years or so and what stands out in my mind is how extremely difficult it was for us with secure, full-time employment and an unblemished record to convince any out of the dozen or so lenders we approached to extend us a loan of a size that would not buy a fibro dunny in Sydney or Melbourne today (got us a basic – but perfectly comfortable – house on 1.5 acres not far from town with all services and amenities). The local Bank of Queensland branch manager even gave us a lecture on financial responsability!! I know that sounds like bull but I assure you it’s true! We had given up hope when one finally agreed to lend us the money.

        Yet just a few years later, large loans appeared to become dramatically easier to get. A mate told me that the loans officer asked “can you afford it?” To which he of course replied yes and was given the loan.

        Credit certainly seemed to become much easier to get just after we bought so it’s little surprise that the easier credit is to obtain, the more of it people will take on. And up and up goes the price of things purchased primarily with credit.

        I’m kind of glad that it was bloody hard to get when we were out looking – we were young and might have more easily been tempted into indebting ourselves to the eyeballs had anyone been willing to extend us the equivalent size loan I’ve seen many young people taking on since.

      • Spot on Flawse, Keating owns this.
        Yet both “sides” of politics and the chattering class (journalists, lawyers, teachers) love him.
        He is the founding father of The Australian (Icelandic) miracle. The one politician I truly despise.

    • “We had to virtually scrape and bow to every lender in the place before one finally agreed to extend us a loan”
      Haha nothing has changed in almost 2 decades… except 28% now admit to committing fraud to get it, on an asset worth 1/3 of current nominal. You bought pre-hyper bubble so this isn’t go at you.

    • Jumping jack flash

      “Of course the irony is that lowering rates has simply led to ever balloooning debt rather than people actually paying it down”

      Was it ever going to be any different?

      The whole system has been cleverly constructed to maximise bank profit.
      Banks make their money through debt.
      Therefore, the whole system has been cleverly constructed to maximise debt.

      Banks’ propensity to secure mountains of debt against property prices, manipulation of interest rates “to control the economy”, infectious capital gains fueled by debt, negative gearing, buyer/seller concessions, foreign investment and the impotent FIRB, manipulation and redefinition of CPI – and most recently – ignoring CPI altogether, redefinition of unemployment, foreign students, blatantly ignoring or downplaying systemic risk.

      All this and more has taken decades to assemble and implement to make the greatest debt bubble machine in history.

      And now all we need to do is to sit back and wait for someone to hand us a mountain of debt that we can enjoy, while they pay it back to the bank. Instant riches for no effort. Its the way the game was always meant to be played.

    • Leftee the Keating reforms made us very much a reed in the wind of the big economies particularly the U.S. A look at U.S. M3 and CAD around that time would probably be instructional!

  6. Does your analysis take in consideration impact of reduced household spending after each rate hike? If rates go up by 50-75 basis points household spending will be severe enough to trigger job loses in the retail sector that will start sending thousands of low income mortgagees into default.
    I think your modeling assumes that each rate hike will not have material impact on jobs.

    “So, around 20% would have difficulty with even a rise of less than 0.5%, whilst an additional 4% would be troubled by a rise between 0.5% and 1%, and so on. Around 35% could cope with even a full 7% rise.”

    Could you model what happens if all mortgagees spend around $200 per month less in retail shops.

    • Nikola
      Precisely! Consumption is about 75% of the economy – that percentage driven down a little by the mining boom. However ANY rise in rates is going to smash the economy.

      • I’d say this is already happening without any rate rises. I heard from a credible source that at least one major retailer was 25% down on budget for the Boxing Day sales. YOY down badly as well.

      • Jonathon
        Interesting stuff! I am in discretionary consumer goods wholesale. Our Christmas was pretty devastating. There is more to our situation than just reduced overall demand but the tanking is way outside what would be explained by other factors. Got a name or is that a bit confidential?

      • Hence why I think even 50-75 basis points will freeze the economy. First 25 basis points hike will shift all low income mortgagees into Interest Only but will still slow down consumption as households will try to get ahead (futile at this point but they will) and start saving. Next 2 hikes will start sending people under.. Top this with lower spending by all mortgagees.. By then we will see number of Retail chains closing down – K-Mart, Big W, Target, Katies etc – not all of them but some of these chains will go down during this time.
        And it start to look like we will experience hikes when Auto is shutting down and probably when IO and Coal will also go down back to where fundamentals say they should be. We will not be so lucky this time around.
        And what if (I know this is big what if) China really finds a way to stop outflow. —- We Are Fu&%*d.

        There is only one thing that none of us takes in account – Banks may decide to accept lower returns and not hike as aggressively. Better lower returns than going bust right?

      • All true!! I will say i’ve given up trying to predict prices however a Chinese steel mill of my close acquaintance has always said USD 60 was the long term price of IO. FWIW.
        “Banks may decide to accept lower returns and not hike as aggressively. Better lower returns than going bust right?”
        Yep…but imagine the effect on their price…then imagine the effect on Super Funds and the flows therefrom! There is no way out!
        The answers lie back in time.

      • ‘I’d say this is already happening without any rate rises’.

        Spot on Jonathan. Flawse, this has everything to do with real inflation and non-existent wage growth. The frog is being boiled slowly and it doesn’t even know it. Cost of living keeps skyrocketing and there’s no income growth to stop the squeeze.

        As for interest only transitions Nikola, that happened two years ago (recall the article about bank loan portfolios jumping from 30%IO to 60% in the space of 12 months).

    • Beautiful!…totally consistent!
      Either you have more self-control than anyone I know or you have another nic!

    • it will be a party of rent seekers fiasco….the biggest rent seeker of all(the banks) will be happy for the stealth inflation that results from increasing rates via increasing rents. more business costs, less profits, more jobless queues and the cycle feeds itself….AWESOME

    • You don’t need to put rents up, the govt will make up the difference- that’s the beauty of negative gearing.

  7. Surely the govt will go for inflation rather than rate increases. After all, it worked beautifully inflating away the previous generations mortgage debt. Whenever I think of govt policy now, I think “what would be in the interest of high property prices”, and that’s where they go.

    • was..It didn’t inflate it away – it inflated it to the present! 😉
      If inflation rises it’s a fair bet the RBA will ‘look through’ the inflation and would continue to do so until inflation is totally out of control. Offshore funding rate rises are a different kettle of fish. They happen whether the RBA likes it or not and, contrary to MB theories, there is nothing the RBA can do about rates once that little feedback loop gets running.

    • Go and have a chat to Angela Merkel and tell her that you are going to inflate away the value of the work and savings that her country has toiled so hard to accumulate over the last 70 years and see what she says!
      It’s all very well to inflate away the debts of the indebted, but the flip side is that it inflates away the value of hard work and the savings of the real wealth generators. In the long run, it won’t and can’t work; never has, never will! (NB: We started down this road in the 70’s after seeing how ‘successful’ it was after WW2…and just look at where we are!)

      Have a look at how Japan has handled the ‘inflate away other people’s debts’, intentionally or not, and see where they are and what the rest of us can expect in the not too distant future…..and it isn’t inflationary!

      • Yes it’s the question the debt moratorium people always refuse to answer. I ask it especially about Mr and Mrs Wang in China who, even while impoverished and living in a very small substandard dwelling and eating mainly rice, saved 30% of their income for a rainy day. Now we are going to confiscate their savings to save us in our over-large air-conditioned palaces?

      • Flawse,

        Mr and Mrs Wang will never know.

        The process was that the Chinese government effectively confiscated export earnings by forcing the conversion of FX into Yuan. It then used those export FX earnings to bUY treasuries (approx 4T) and offshore assets to maintain a lower Yuan. That process kept Mr and Mrs Wang and their son in a job that they might not have had if the Yuan had been allowed to rise.

        The off shore assets bought by the Chinese government, SOEs, private corps and individuals are still owned by China and the value of those may fall if we stop inflating the prices of those assets and allowing folk like the Chinese to buy them but at the moment those offshore buyers are crowing.

        As for the financial assets – treasuries, deposits and assorted bonds sold by our banks – they will only lose value if the relative exchange rates move. The interest rates are fixed, only the yields move. When one contract expires a new contract is entered at whatever rate is agreed. Wouldnt you rather be the creditor.

        Dont have too much sympathy for Mr and Mrs Wang – their govt did a deal – export Chinese capital to keep more jobs in China.

        Mr and Mrs Wang still have their savings tucked under the pillow or in the PBOC. When the Yuan starts rising again they will be worth more than when the govt was driving a massive capital export program.

        The real suckers are Mr and Mrs Jones in Australia who allowed their pollies to swap their kids jobs (via an inflated AUD) for large debts and inflated asset prices.

      • Mr and Mrs Wang will indeed know. To forgive debt here you are going to have to wipe out all the debt the banks owe by unilaterally declaring that we are not going to pay back any of the money we have been loaned. That effectively wipes out deposits everywhere else in the world.
        (as well as in Australia – just to reward the profligate and put them in a position to over-consume even more.)

      • Germany uses the Euro to have an artificially low exchange rate so in effect the working class has a lower standard of living that they otherwise would. Angela Merkel doesn’t give a rats arse about preserving the efforts of German people. Mercantilism benefits the owners of capital not the workers.

      • adelaide_economistMEMBER

        Unless there is some serious improvement in the political management of Australia our future looks like Argentina. There’s plenty of parallels between the two, not least that both were similarly wealthy and had similar economic structures back at the turn of the 20th century. Australia may have (supposedly) stumbled into low growth due to the (apparently) awful trade and industrial protections implemented but it still kept getting richer while Argentina fell right off the pace and never recovered.

        A kleptocratic class running the place and degrading institutions seems to have had a lot to do with it (rather than the orthodox fairytale about pursuing an ‘open economy’ as a path to success or otherwise) and it really does start to look very familiar in the Australian context. We are effectively in a stage of heavy financial repression to my mind and it’s only going to get worse short of some miracle probably emanating from overseas (ie a fundamental change in how the world economy is restructured of which – as usual – Australia will be required to follow along with).

        There’s certainly not much appetite for any good reform in Australia in either the political or business worlds… handing out corporate tax cuts to largely foreign owned companies or pointlessly persecuting the sick and poor (even if ‘innocent’) doesn’t count as ‘good reform’.

      • @Pfh007 while it is true that the Yuan conversion process had the effect of depressing the exchange rate I’d argue that it was mainly necessary because of the huge capital inflows that were occurring as a result of Western companies relocating their production to China. In a way it was China creating a SWF, to balance the economic distortions of capital inflow…this is exactly what Australia should have done when the Aussie mining boom resulted in huge external capital in flows and an absurdly high exchange rate. Unfortunately the chapter is yet to be written on Central bank management of economy distorting capital flows, when that chapter is complete I’ll bet it includes CB mechanisms to export capital…a kinda hattip to recognize that the PBOC understood what was needed and did what was necessary.

      • Jumping jack flash

        Any talk of playing with the very fundamentals of the financial system is rubbish.

        Debt must be repaid in full plus interest or the whole thing is (eventually) null and void.

        But, if we don’t want to repay the debt, or if we try to induce hyperinflation to “inflate it away” (actually it would simply counter or spread the hyperinflation the debt bubble has *already caused* to the segments of the economy the debt was concentrated in, such as house prices) then I’ll ready my cow to swap for a couple of bags of carrots and potatoes.

      • “Debt must be repaid in full plus interest…”

        Given that about 97% of money is debt how would that be possible?

      • Flawse,

        “..Mr and Mrs Wang will indeed know. To forgive debt here you are going to have to wipe out all the debt the banks owe by unilaterally declaring that we are not going to pay back any of the money we have been loaned. That effectively wipes out deposits everywhere else in the world…”

        Forgive debt?

        Australian debt?

        Directly or even via inflation?

        That is never going to happen. Dont forget what happened to Jack Lang when he floated the idea of putting the interests of Australia first.

        Nope a larrikan always pays his debts.

        Our creditors, including Mr and Mrs Wang, are never going to tolerate that even though defaulting on debts owed to currency manipulators would hardly keep me awake at night.

        Naturally my position is not to allow unproductive capital inflows in the first place so paying past debts has the benefit of teaching folks a lesson. So we should pay up Mr and Mrs Wang………I suppose……. not that I owe them a dime.

      • CB,

        Not sure that was their reasoning as it looked like pretty standard mercantalism but ultimately one can only export capital if someone is willing to accept it. If countries limited inflows to productive capital inflows I am not sure their trade rivals would be so keen to export capital to them. Investing in the productive capacity of trade rivals can make sense but not usually to the mercantalist mind set.

        There was always an alternative available to China – invest more capital domestically productively – but being a factory to the world is an excellent way of making a great leap forward that is actually a great leap forward.

        Whether it made sense for us to assist the CCP make that leap is another issue. I think so but mostly on the assumption that the middle kingdom is not interested in empire.

    • I’m not sure governments or central banks can manufacture inflation anymore. They have been trying since the GFC and not had much success.

      Japan has been trying for two decades and still have not managed it.

      • I’m not so sure, as the western world seems to be doing a decent job: London prices are up 85% since 2009, Sydney up 86% in that time period, new housing bubbles forming worldwide, etc. I consider that a pretty successful inflation campaign with plenty of momentum remaining behind it.

        Small but regular incremental prices of food and other necessary consumables, is a regular observation during my trips to the shop. If people get take-out for lunch, they will notice a lot of prices have placeholders or new numbers crudely overlaying what the old prices once were. I’d like to see where we lie on the Big Mac index now for example.

        I personally think it’s only hard for them to produce inflation as they’ve now managed to move most of our life’s necessities out of the inflation basket.

  8. Mark HeydonMEMBER

    Tip to the author – the charts would be better drawn as cumulative frequencies rather than incremental frequencies so you could read off the proportion of people affected by a rise of x% or less.

    • Good point. Also, the graph should start at 0.0% rather than 0.5% – so we can see how many people are already in trouble even with rates at their current (historically low) values.

  9. look property prices are going to continue rise, that’s why the federal minister for health is investing, indirectly, tax payer monies into property.

  10. ‘Affluent Mortgage Stress’. That’s exactly why the largest falls circa 07 to 09 were in the blue chip, ‘you can never go wrong if you buy well located, top class property’ markets. Another piece of property industry dogma.

    • Mining BoganMEMBER

      Yep, the reason why that idiot Rudd stuffed up with changed foreign investment rules and extra first home rort.

      Protected his own. There’s no fate bad enough for him, except maybe ignoring him. He hates that.

      • adelaide_economistMEMBER

        Yes, without question the worst thing Rudd did despite the ‘meeja’ continually ignoring it and trying to say it was the climate change clusterf*ck or the fiscal stimulus (oh noes, the pink batts).

        What it did show me though was how false all the claims of ‘strong fundamentals’ for housing are. At the time of the GFC I was actively searching for a house and I distinctly remember one house (and it was inner city, not in some far flung suburb) where the asking price (on the online advert itself!) dropped about $10k a week after going online and another $10k a week or two after. Panic was truly in the air.

        ‘Thankfully’ Rudd put the full weight of the Australian government and a world awash with fake/cheap money to work to remedy this reckoning and as everyone on MB knows we continued on our merry way to talking about 10% or 15% annual price rises in housing as perfectly normal and proper.

  11. Jumping jack flash

    “This, once again, shows third party loans are more risky. This perhaps is connected to the types of people using brokers, as well as the broker’s ability to suggest lenders with more generous underwriting standards and coaching on how to apply successfully.”

    Aha! Royal commission into mortgage brokers… not banks. Banks have a degree of separation. They have plausible deniability. They have covered their white, pimply, generous arses with a shield made of mortgage brokers.

    But, good luck with policing that herd of cats that are the mortgage brokers, much less Royal Commissioning them. I don’t know what are the requirements to become a mortgage broker, I’d say it is very similar to becoming a real estate agent, so it’d be like trying to Royal Commission real estate agents.

  12. ewsydney995MEMBER

    How is this even possible?!?!? I thought all new borrowers were stress tested at 7% interest rates . Lol.