Aussie households face trial by fire from soaring mortgage rates

The Bank for International Settlements (BIS) has released its global household debt statistics for the December quarter of 2021. This data shows that Australia once again took the silver medal for household debt when measured against Gross Domestic Product (GDP).

As shown in the table below, Australia’s household debt-to-GDP ratio was 119% in Q4 2021, second only to Switzerland (130%):

Global household debt

Australia takes out household debt silver medal.

The next chart plots household debt levels across English-speaking nation’s, with Australia’s debt load well ahead of Canada (108%), New Zealand (99%), the United Kingdom (86%), the United States (78%), and Ireland (30%):

Household debt across Anglosphere

Australia leads English-speaking nations.

However, because mortgage rates fell so sharply over the pandemic, Australian household’s debt repayment ratio – i.e. principal and interest repayments as a share of disposable income – has also fallen; although it remains well above the other English-speaking nations surveyed:

Debt servicing ratio across nations

Debt repayment a bigger burden in Australia.

The situation had begun to change, however, even before the Reserve Bank of Australia (RBA) commenced its rate hiking cycle. The next chart combines the BIS series with the RBA’s household/mortgage interest payment data:

Australian household debt repayments

Record gap between principal and interest repayments.

The ratio of household interest repayments to income fell to a record low 5.2% in December 2021, less than half the peak of 13.5% in December 2008.

Similarly, the ratio of mortgage debt interest payments to income fell to 4.4% in December 2021, which is less than half the peak of 10.8% in December 2008.

However, the green line in the above chart is interesting. It shows that total household debt repayments (i.e. both principal and interest) rose slightly between the March and December quarters on the back of the sharp appreciation of housing values:

Australian housing values to income

Soaring property values over the pandemic drove up principal debt repayments.

Accordingly, the rise in mortgage principal repayments because of soaring house prices exceeded the sharp fall in mortgage interest repayments due to declining interest rates.

The implication going forward is obvious. Fixed rate mortgages had already risen sharply since the December quarter, whereas variable mortgage rates have just risen on the back of 0.75% of hikes in the official cash rate (OCR) by the RBA:

Australian mortgage rates

Rising mortgage rates.

With economists and futures markets tipping mortgage rates of between 6% and 7% by mid next year, total household debt repayments are set to soar to around the 2008 Global Financial Crisis peak (economists’ OCR forecast) or well above it (futures market’s OCR forecast):

Projected household debt repayments

Debt repayments to soar as interest rates rise.

The upshot is that the proportion of Australian household income going towards debt repayments will rise sharply, which will sap disposable income, restrict consumption spending and growth, and will put strong downward pressure on house prices.

At the start of the Global Financial in 2008, the RBA mistakenly hiked the OCR by 1.0%. After the economy ground to a halt and house prices began to fall, the RBA was forced into a sharp reversal whereby it slashed rates by 4.0% over just six months.

I can see similar happening again after the RBA again goes too hard on tightening. I wouldn’t be surprised to see the RBA once again being forced to cut rates aggressively in the second half of 2023 to counter deep falls in house prices and a recession.

Unconventional Economist
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Comments

  1. “I can see similar happening again after the RBA again goes too hard on tightening. I wouldn’t be surprised to see the RBA once again being forced to cut rates aggressively in the second half of 2023 to counter deep falls in house prices and a recession.”

    but what does CPI have to be to allow it? will they be cutting with 4%+ CPI prints even if GDP is negative and unemployment is rising?

    • pfh007.comMEMBER

      Exactly.

      Just because we have managed to engineer a world leading housing debt millstone doesn’t mean that inflation will automatically behave even if rates rise. Controlling inflation with interest rates is painful which is why central banks hate to get behind the curve and wait too long before acting.

      Unless rising interest rates actually achieve a rise in unemployment or the ALP flood labour markets with cheap imports (where will they live) an unemployment rate of less than 4% is likely to result in rising wages especially now the pandemic is not holding them down.

      Plus inflationary expectations are likely to start increasing if they have not already.

      • Arthur Schopenhauer

        Given ten years of wage stagnation, what is wrong with a rebound in wage inflation?

        Disclosure: Wage inflation helps my business, immensely.

        • pfh007.comMEMBER

          Arthur,

          What’s wrong with inflation?

          The main thing seems to be that most people don’t like it.

          Debt peddlers love it because it makes their products appear more affordable even after the higher interest rates that come with inflation.

          • What do you know about the populist movement of the late 1800s? I heard (never investigated it) that the regular folk (particularly farmers) wanted an inflationary currency because the gold backed system was deflationary at the time and that deflation was destroying them as they could not repay debt. There was also mention that this system was deflationary because productivity was increasing sharply and the gold supply couldn’t be expanded fast enough to counter it. Also some talk about banks hording the gold etc.

            It may explain why some inflation is considered good today and help explain why the banks etc want a way to increase monetary supply at will (though they have definitely messed that up). I’ll look into it one day I guess, just thought you might know.

          • Most people with savings in a bank account would hate inflation as it destroys their purchasing power. If you own multiple assets you probably don’t care.

  2. Camden HavenMEMBER

    Forget about rates and focus on the really scary variable ….. spreads corporate, sovereign and MBS jus to begin with. It’s the repricing of risk.

    • Grand Funk RailroadMEMBER

      Yeah that is starting to look very concerning.

      I reckon it bakes in what Leith is referring to above. The RBA (with what I think is very little inflation to chase apart from supply bottlenecks of an economy in in a commodity offtake-housing speculation bubble) will follow those spreads until the point where it is so obvious that the economy is ‘broken’ that they blow their own credibility out of the water, and then – as Leith says – they will walk it all back, and the AUD will do an Acapulco dive into the merde.

      The AUD may even act as something of a trigger. At the moment it is higher reflecting OCR and commodity prices (thanks Ukraine war) and off the back of Fiscal (Scomo Covid) stimulus. It has come off maybe 3 cents in the last week or so as the world reads US inflation data, and starts to chew over a completely uncompetitive economy in Australia (worlds most expensive people, land energy and internet for starters) carrying mega loads of debt, ejaculated into the worlds most expensive housing.

      It has a new government which, if not thrown under the bus, has plausibly got aboard the bus as a grill decoration, and from that position cant hear the passengers with their issues about energy prices and debt and keeps yelling that it cant do anything about them, and may have a primary focus on gender equity and the wording of the acknowledgement of country, and not failing to deliver tax cuts for people in the nice cars overtaking the bus. It is now also yelling about getting more people on the bus from overseas. The passengers who had come to loathe the last driver, are now wondering how he is doing, and also if they have any cutlery in their bags. They are all still wearing their masks, and sone are itching for a gasper. The bus will soon go past an awful lot of shops which appear to be closing.

      It has driving the bus the RBA, which was placed there by the previous government which refused to drive, but focused primarily on talking in tongues about markets and worrying corruption implementation and perception management. The RBA has only got a Certificate IV in driving an economy and only knows about accelerators and interest rates falling, while house prices go up Now it is experiencing a lot of things it has never experienced before but which it did read about in the guide – things like inflation, balance of payment crises, economic competition and (need for) policy reform. It doesnt know it but the modus operandi of previous generations of stopping frequently enough for people to get aboard has been replaced with a modus operandi of people go into debt to buy a house and in that way leap aboard a bus at speed – it was a faster more efficient way to board busses according to the consultants. It has been calling out for a number of years to ask if anyone else in the bus knows how to drive the bus, but has been met with silence all round – with many passengers having been on a trip from ‘Last Recession’ to now almost completely unaware that anyone actually needs to drive the bus.

      Finally it has someone calling back that it will drive the bus. The problem for the RBA is that said person is in fact a grill attachment and the only way for the the RBA to give up its position in the drivers seat is to crawl out on the bonnet of the bus and swap places with the new government and assume a position as a grill attachment. It is dubious about that seeing as it has a lot of revs up with all those interest rate cuts.

      The grill attachment calls out that it will come up to the drivers seat if the RBA gets on the roof. The problem with that is that there are a lot of first home buyers abd apartment buyers in Sydney and Melbourne, on the roof who will be thrown off the bus the moment the interest rate brakes are touched and may be inclined to club the RBA and throw it off at the first suggestion. The new government says it is coming and turns around on the front bumper to cling to the grill with its bum facing the oncoming traffic. The revving of the big V12 engines blocks out all competing sounds as it reaches across the hot bonnet for something to cling to to pull itself up in front of the windscreen. As it does so some of the passengers ask what is going on and who is that person climbing on the bonnet. The RBA yells out ‘thats the new driver’ without thinking about the passenger confidence implications.

      The former government from one of the back seats calls out for some austerity and responsible spending – having never hitherto come out with the idea and having liberally splashed fuel about every passenger on the bus and those on the roof [who were encouraged by the views on offer in the prospectus] in particular those with the better seats. Some of these are starting to fidget…….

      TBC

      • As the bus tops the final seaside mountain and hurtles toward the cliff many passengers look past the waves breaking on the rocks for a glimpse of their alternative transportation – the journey they did not take – Clive Palmer’s titanic.

        Perhaps they should have taken a trip with Clive, but there was no practical way of doing it. Their votes were rusted-on to the Liberal and Labor debt bus, and could not be dislodged, even after being savagely lubed-up. There was never any other possibility for them.

        But as they gaze into the hazy distance they are sure they can see Clive’s ship magnificently cutting through the waves. Who is that beautiful red-headed lady standing on the bow with her arms outstretched? Yes, it must be Pauline.

        As the tires leave the road the bus engine screams like an out-of-control generator, the hood ornament dips, and a bus load of loyal major-party voters launches toward Pauline’s waiting embrace.

      • LOL Gunna thanks for that.

        What we need on the Grille is a GTR badge, maybe if we elected someone like Steve Keen we’d get that, but instead we got a Toyata badge. 🙂

  3. Very interesting that countries on the left of that household debt table think they can sanction countries on the right and not face blowback. That is before we look at combined Govt+HH debt.
    Then there is the issue of how that GDP is actually constructed.

  4. LittleEmperorMEMBER

    Hate to say it, but I have little sympathy for those who bought while the cash rate was at 0% and are now concerned about rising repayments. What did they expect would happen? That repayments would go down? How? You can only do so much to protect these innocent, naive souls.

    • Vivian DarkbloomMEMBER

      Not even sure what the bleating is all about – surely every single mortgage holder was stress-tested to interest rates of 7%, right?

      Caveat emptor!

      • They may very well have been stress tested to 7% but did they or the bank ever have a discussion on exactly what that would do to their budget? Did they work out the impact on their budget at 7% i.e no netflix, no takeaways, no holidays, no new car every 3 years?

        • Vivian DarkbloomMEMBER

          I suspect they did not, as the average Australian would have ascribed a <1% chance to the events currently unfolding. And to be fair, past performance would have been indicative of future performance: governments of all colours have been protecting the status quo (ponzi scheme) for decades, so it is only natural to assume that Canberra steps in to protect the population from dumb investment decisions. In that light, Australians really seem to believe that the laws of economics around risk/reward are magically suspended in this country.

          Aside from that, the average Australian is relatively illiterate in general finance matters – and I do not consider watching YouTube videos on how to maximise your IP portfolio as financial literacy. The fact that a lot of mortgage holders believed that LMI was protecting them rather the bank, or that simply lying in your mortgage application – egged on by your broker – is not to your own detriment is instructive here.

          • I think it all stems from a mind set that your house is an income source.
            When annual “wealth” increases from housing dramatically exceed wealth increases resulting from labour / savings then the path to greater “wealth” is obvious.
            You lie, you cheat, you borrow from bankofM&D, you do everything and anything to increases the value of the house that you’re investing in. Maximum house price equates to maximum mortgage leveraged annual wealth increase.
            The fools and their facilitators need to suffer real pain, economically depilating pain, they need to know the pain our depression era great grand parents knew. Unfortunately there’s no other solution, none what so ever. As everyone knows this would be unAustralian so we’ll at least try to find another can kick.

          • Vivian DarkbloomMEMBER

            @dodgy as

            I can understand – without subscribing to – blind beliefs in the omnipotence of the state, financial illiteracy, laziness and raw greed. I can understand fear of missing out and keeping-up-with-the-Joneses. I can understand trusting the ‘lucky country’ meme or Australian exceptionalism.

            The general unwillingness to comprehend that property prices cannot increase ad infinitum to fund lavish lifestyles and conspicuous consumption that is completely out of step with contemporaries in other developed countries while remuneration and economic productivity remain stagnant suggests more than mere ignorance is at work here. Simply take two numbers: (a) a property value of, say, $1,000,000 and (b) a salary of $100,000. While property values double every 4 years, salaries increase by, say, 4% every year. After merely 40 years, properties are worth a whopping ~$1bn while salaries have increased to ~$160k. Anyone, literally anyone, can see that this wealth generation mechanism cannot work for even 40 years, let alone in perpetuity.

            The current Australian economic system is based on squandering our children’s future wealth and well-being by playing a game of ‘pass the knife before it falls’, and it’s pretty much the only game in town right now. When it breaks, which it will, everything breaks.

          • @Vivian
            Yep 100% correct today, just as it was 100% correct 10 years ago, but also 100% useless.
            Aussies just want this, they love the RE game much more than they love working, or dog forbid they construct Productive businesses leveraging their own technical abilities. You’ll never succeed in Australia if you can’t learn to love this game.
            Can it continue for 40 years? logic and common sense says no-way no-how, but that very same logic said the same thing ten years ago or even (to a lesser extent) 20 years ago.
            If it continues for another 20 years than logic will have been wrong for a persons entire working life, that’s one heck of a bad bet for any working family to have made.
            Forty years of being logically right but only poorer for it, that’s how most working families view this problem, so they signup for the mega mortgage and then fear sets in and forces their brains to only ever focus on the upside, it’s self perpetuating stupidity.

            But here’s the interesting thing, there’s no shortage of countries that have travelled down this very same road before us. They all suffered exactly the same “hollowing” of their economies as we’re seeing in Australia today. They all though everything under the bus just for that moment of traction and they all ended life as failed states.

            The metric that’s telling the real story, isn’t GDP or Housing or Stock markets or or or it’s a simple metric called Economic Complexity and it’s being ignored, completely ignored, because apparently it simply doesn’t apply to Australia …see what I mean we’re right back at gotta “love the game”

            I’d suggest reading Viktor Shvets he is very clear on this topic.

  5. 30 year in United States at 6.28 percent with layoffs of real estate agents.as sales fall. A collapsing stock market, preceding a collapsing housing market . Who folds first.

  6. 2023HomelessMEMBER

    How will the newest lender in town respond to falling house prices? The bank of mum and dad roared into the market this time around. They are likely more fickle than a traditional bank and pro cyclical. This is because they were happy to lend as their equity rose and rates were low. Also were lending when they saw prices rising. Combined with the bank of mum and dad loans being treated as deposits, which are leveraged with bank debt.

    Mix it all together and I think bank of mum and dad will stop lending in a rising rates, falling value market environment. Given the large average band of mum and dad ‘loans’ (about 90k I recall) x 5 with bank debt (.45m) then this could cause market responses unlike past downturns when the bank of mum and dad wasn’t a large player.

    Has anyone done analysis on how the bank of mum and dad will respond to falling prices and rising rates? May be a large drag on prices and a new phenomena

  7. Newest ‘lender’?!
    When push comes to shove, let’s see how many of those borrowers believe that have to repay the lender, at all.
    From what I see, it’s an Interest-Free, Debt-for-Equity Swap.
    “We’ll repay you from the capital gains when we sell”. But somehow, it never happens and all gets roll-over into the next purchase.

    • 2023HomelessMEMBER

      Agree. I don’t expect the bank of mum and dad to ever be paid back. I just expect they won’t lend/gift in a down turn. And given it’s treated as a gift and part of the deposit, it would have a major impact on maximum loan levels.

      • Display NameMEMBER

        I don’t expect many of the loans taken out at multiples of 6+ times debt to income will ever be repaid. It would need a wage inflation like we have never seen before along with a long period of low interest rates…

  8. Arthur Schopenhauer

    Yesterday, there was an add from Grays Auction House pushed to me on an MB page. (It’s usually trading App and fancy car adds.)

    It said: “Sell your Caravan, RV or Jetski with us.” First time I’ve ever seen an add like that.

    Pretty sure it was meant for the next door neighbor! 😂

    Edit: Is it the start of the great adult toy bankruptcy? Very similar vibes to 2007/2009 in the US.

    • I’m keeping a close eye on this sector as a sort of leading economic indicator.
      So far I’m not seeing any discounting matter of fact everyone still demands an insane premium.
      Just the other day I was looking at some products on Gumtree selling for well above MSRP.
      The value proposition : available for immediate delivery
      So the bigboy toy market has a long way to go before we start seeing GFC pricing.

      • darklydrawlMEMBER

        I have noticed this for the past couple of years. There has been a distinct lack of ‘sales’ events that present genuine savings (such as EOFY sales et al). This makes sense as there is little point in a retailer discounting a product that is already in short supply with high demand. EV’s are a good example of this. Even if you have the cash for one today, the lead times are around 6 – 12 months between placing an order and picking up the vehicle (if you can get the model you want at all). “available now” is the new ‘lower price’.

  9. reusachtigeMEMBER

    LOLOLOL youse blokes are really carrying on about this. I hope the powers that be listen to all your squawking and Lower teh interest rates, that will fix thing!!!

  10. You mean aussie “indebted households who didn’t plan for higher rates and assumed it was lower forever” face trial by fire from soaring mortgage rates.

    Ok, kind of not news then though. Kind of expected isn’t it when you put it in proper context.

    • Divya
      Bcn here
      This is what’s going to happen within. 75% accuracy

      RBA will jam rates up, they’ll over do it & they’ll not only drag property down they’ll be taking the banks down aldo

      Fixed rate home loans will have a 6 handle btw 5.5 & 6,5% in next 2 weeks think now 3,4,5 are in the 5s%

      They’ll be cutting I’d guess Oct this year but won’t save the housing market

      It’s not how much house price falls there will be no buyers

      Rates will go to 0% & lower, I’d say Aust 10 year will now go from 4% to negative 2% that’s a 6% fall

      You guys are smarter than me, RBA will be negative 3,4,5% cash rate unlimited QE to stop the collapse of our financial system

      Labor will do MMT, HELICOPTER, they’ll run the national debt & budget deficit into 100s more billions & id say a trillion over next several years

      If you want a job you’ll be working for Dan & Albo because HH debt is going to wipe out the private sector, wipe out the banks

      It’s going to all be government spending borrowing

      You are going to see a re run of 1980s stagflation this decade

      90:day bank bills were 19.5% in 1989

      You’ll see well up into the 20s this time & possibly 30s%

      Forget borrowing in the future debt markets will be crowded out by government

      The HH can’t compete with government

      How will you value a house, think it’ll be replacement value but it’s going to be land that is worthless & building where value is

      Just won’t ne buyers at any price for many properties

      Need to own agriculture & minerals metals precious metals

      I know MB is commodities crash they are wrong & wrong on AUD its going above parity

      • “within 75% accuracy “
        Do you even understand what nonsense you’re spruiking?
        And how did you evaluate the uncertainty? Using Gaussian processes?
        Perhaps provide the link to the Jupyter notebook?
        Or is it just writing on the wallSun again?

        • Come on mr Tezza
          You were one of the loudest laughing at me when i said Aust Fixed rate home loan interest rates would touch 5% by mid this year
          No one was even remotely close to me anywhere in Australia saying we’d see 5% 4 & 5 year fixed rates
          At the time DLS said home loan rates were going negative & there was no inflation
          I think you were a phil Lowe believe that rates would stay low until 2024 lol
          They went up 2 weeks after he said that

          Macrobusiness has been banging on no inflation rates are going down & 10 year is 4%

          Macrobusiness has been saying the AUD is crashing & copper is crashing for 9 months and I feel it’s ground hog day
          Copper still above 4 & AUD give or take the same as evergrande collapse

          Sounds like flogging a dead horse

          Bye bye

          I’ll come back when iron ore is $300 & AUD is 80c

          Until then enjoy yourselves

          • I have been laughing at you only because of your ridiculous forecasting “methods”.
            But, I do hope you’re right, as usual. If for no other reason, then at least to see the madness rewarded.

      • Hey bcn, thanks as always for your thoughts.

        I would imagine if the housing market causes a banking crisis then rates get cut and the AUD goes well south, close to 0.60c. If that aligns with a global crash then below where it hit 0.55c during COVID March 2022, sub 0.50c is well possible. Can’t wait for the way under water debt-loaded crypto whales leveraged to the gills being forced to unload. That’ll wipe out so much fake spending.

        Then, as the AUD craters and inflation flattens off globally into a really nasty stagflation, then it’s resource hoarding central on steroids, which will push the AUD back up, but it’ll need the RBA to go the full Monty with bells on and give the banks a TFF in the trillions.

        Whatever happens, a lot of people are going to lose their shirts and Lambos will be cheap.

        In NZ the leader of the Opposition (Ex AirNZ CEO) is a muppet who today suggested that the government cut its spending to cut inflation. Utterly clueless about how an economy works – like so many of his brethren in the halls of power all over the world.

        Having seen the RBA throw APRA under the bus yesterday and play the blame game tells you a lot of panic is underway, and they have no clues on how to put 9 trillion genies back in the debt bottle…

        Look out below. Hope no one owns AfterPay shares. Aussie dollar to 60 and below first.

      • I’m willing to take the opposite side of your bet. 75% chance of instead of cutting by Oct – RBA will keep rising. Inflation is not going away with RBA raising rates since the genesis is supply side issues – oil, gas, coal, electricity, etc etc. The demand destruction won’t keep pace with the supply side inflation.
        Fuel excise rolls off in Sept – but I think Labor may end up having to extend that.
        The oil/gas market are one disaster away from high $100’s or low $200 oil prices and we haven’t even gone through the US hurricane season yet…
        That’s the first order effect on inflation – then you have all the downstream effects of higher oil/gas prices on everything else.
        We will be lucky if interest rates start dropping by 2H next year.

        Interest rates are going to be sky high and no where near negative in the next 2 years – not just due to inflation but exploding yields in ALL bonds and the inevitable collapses. This time bailouts will be limited given govt debt/yields will be much higher than the GFC.

        Japan is the current example of a country trying to swim against the tide and its not looking pretty for them.

        • No problem happy to take that bet
          I think you were one of the many on here that said interest rates were going down when they were 1.99% fixed
          Now you are all going to miss the fall in home loan rates in Q4
          Won’t save property
          Banks are going down with house prices holding hands this time

          • I was pretty agnostic on interest rates until the Ukraine war. When oil got to $100/bbl+ then it became pretty clear there is going to be a massive inflationary pulse. Now with gas prices rising and delivering inflationary pressures again it is going to be the inflation gift that keeps on giving.
            Where I agree with you is housing and banks are in trouble – it won’t in a period of low interest rates.

          • No I do not get it. Lower home loan rates in Q4 and house prices still crashing???
            How. What. Explain.

      • @Pjmat @Bcnich thanks for sharing your predictions, I find them interesting to say the least. Weather I agree or not. We haven’t experienced turmoil in the world like we have today. I think China is going to make a move on Taiwan also. Maybe not right away, but soon enough. That will really shake things up globally.

    • darklydrawlMEMBER

      I struggle to understand why anyone would take a ARM style 15-30 year loan believing that their interest rate will be lower or static for the entire duration. Seems a hell of a gamble to me, but perhaps they are smarter than me as it might pay off if things of really pear-shaped. Governments these days (of all ilk) seem to have little appetite to having anything fail on their watch. I can imagine the taxpayers bailing out all the “Mum and Dad” homeowners whilst screwing over everyone else.

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