Mortgaged Aussie households face devastating interest rate shock

The Grattan Institute has published analysis showing that Australian households with a mortgage are facing a sharp rise in mortgage interest repayments in the event that projected increases in the official cash rate (OCR) come to fruition.

The median economist is now tipping the OCR to peak at around 2.75%, whereas the futures market is tipping the OCR to hit 3.7% in May 2023.

According to Grattan’s analysis, mortgage interest repayments would rise above where they were when the OCR peaked at 17% in 1990 under both the economists’ and futures market’s forecast. This is because higher home prices relative to income “has meant that for any given mortgage rate, the share of income taken up by mortgage payments is much, much higher”:

Mortgage  interest repayments to household income

Grattan also found that buyers who purchased in 2021 will face much higher repayments over the life of their loan:

Lifetime mortgage interest repayments

Grattan’s findings follow freelance journalist Tarric Brooker’s recent analysis, which showed that Australian households are facing their sharpest ever rise in mortgage interest repayments.

What about mortgage principal?

The problem with both studies is that they only examine mortgage interest repayments and ignore loan principal.

As illustrated by the green line in the next chart, the extreme inflation in Australian house prices has meant that principal debt repayments as a share of household income have lifted while interest repayments declined amid falling rates:

Australian debt servicing repayments

Therefore, while household interest repayments collapsed to all time lows (blue line above), principal and interest repayments were at 2004 levels (green line) before the RBA commenced its tightening cycle.

Since both principal and interest must be repaid, it is the green line that matters to the analysis, not the blue or red lines.

Australian households face record debt repayment burden:

If mortgage rates rise by the economists’ 2.75% OCR forecast, then principal and interest repayments as a share of household disposable income will lift slightly above the 2008 Global Financial Crisis (GFC) peak:

Projected debt repayment burden

However, if the latest futures market forecast is correct, and the OCR soars to 3.7% by May 2023, then principal and interest repayments as a share of household income will soar way above the GFC peak.

In either scenario, Australian households will face an extreme repayment shock and financial duress.

Unconventional Economist

Comments

    • Holiday In ScomodiaMEMBER

      Janet gets it! Even 40yrs would let a lot of [email protected] be recapitalised and stress avoided, already standard for a lot of folks who get into trouble but can put together a reasonable argument they can one day get back on track. We’re living for longer so let’s roll them loans on out! Ya! Rawhide!

      • DingwallMEMBER

        Push the problem away and onto others?……
        I say let the markets sort it ….. it’s what should be happening and should have happened….. look at the zombie companies everywhere that are being kept alive.
        I don’t like seeing mortgage holders impacted but it was allowed to get to this sorry state of affairs. We talk about “super profits tax” on minerals etc, why not housing………… people are making stupid profits while we have potential FHB’s enticed into a stupid market and homeless people/people in need of low cost housing on the rise.
        Fix the damn root cause.

        • Holiday In ScomodiaMEMBER

          I absolutely agree, however went full baked beans and ammo in 2009 and have thought every ‘big event’ since would be ‘the one’- but easy ways out and can kicks to keep the status quo always seem to eventuate. I’m sceptical this next little while will be any different, even though I am way, way better prepared than most. I guess in the interim I learned to ‘temper my sense of justice’…

        • “Fix the damn root cause.”

          agree … revoke the imposed 20 years of mass immigration ideology and set immigration intake to 50,000 nom.

      • yay! lets see how far inflation goes when people then refinance to 50yrs and squeeze out equity to spend in the economy which means that 3.7 just went to 4 rates!!!
        Unfortunately you have to view policy impacts based on behaviour of the dumbest and the greediest.

    • Vivian DarkbloomMEMBER

      The monthly interest payment on a mortgage does not change in response to extending the loan term…

  1. DingwallMEMBER

    Really shows how house prices are in nosebleed stupidity levels when a relatively minor rate rise causes such angst.
    Watch the idiots in charge as they procrastinate and argue until they decide to chuck subsidies around to all and sundry…….. power subsidy, FHB subsidies (again and again and again), fuel subsidies, rent subsidies etc etc.

    Never will they address root causes and the spiral will go on. Ultimately the crisis comes into play and things may, just may, change.

    Don’t Panic!

  2. SnappedUpSavvyMEMBER

    Reading this site everyday while trying to sell a house is not recommended 😩

    • Ian ArunMEMBER

      good advise, i think its best to forget this site for few weeks…Mine is going to market next week…

    • Arthur Schopenhauer

      This is Australia. There’s always a greater fool with a mortgage broker in tow.

      Good luck. 🍀 only got to find one.

      • Ian ArunMEMBER

        Thanks you, hopefully i find one….Will post how it goes…its a new build completed couple of months ago in a good school zone in Perth…

  3. Given Australia’s mortgage stock has a high percentage of interest only mortgages , is that a good thing or a large canary , particularly if close to reset .

    • Interest only loans are infinite term. So there is no room for renegotiation to a lower rate. Investors don’t have an offset account attached like people trying to pay off their homes either. When people tighten their belts and stop holidaying, then a glut of properties will flood the rental market as Air B&B struggle with regular income. Expect a rush to the sales exits first.

      • That will be an interesting dynamic to emerge. I think quite a bit of rental stock will come on with higher rates.

        • No infinite as the expectation is always to refinance and never pay off the mortgage, which provides a tax benefit to investors. Banks want the never ending interest stream. However with zero principal repayments any significant fall in values puts interest only investors, and thus the banks underwater. Especially true when equity from capital gains gets used for more house purchases. The banks essentially trade profit for risk. Obviously I’m aware that interest only loans come with terms, but savvy investors don’t consider the possibility that their costs might go up suddenly one day. As for interest only for owner occupier, that’s just subprime ponzi juice when all notions of prudent lending have gone out the window and everyone knows that the end is nigh.

          • Cool. Just wanted to confirm they have to refinance periodically and that’s obviously getting harder at the moment. Who knows if that will still be the case in 2-3 years though with this managed ponzi we call the property market.

  4. MB really putting out lots of SHOCK headlines and pushing hard for interest rates not to rise.
    Are they getting paid for these scare tactics?
    Have they just bought some overpriced property?

    • pfh007.comMEMBER

      I think it is about appearing to be consistent.

      After all MB were huge supporters of the RBA cutting rates to zero even when it was clear there would be no macroprudential rules by APRA to prevent that cheap money flooding into the prices of existing housing.

      They called the RBA lunatics for not cutting fast enough or far enough.

      https://www.macrobusiness.com.au/2020/10/rba-and-apra-protection-racket-epicentre-of-australian-decline/

      Perhaps now that rates will rise there is a bit of buyers remorse camouflaged by calling the RBA lunatics for not now ignoring inflation…..which is an independent central banks whole reason for being.

    • Very interesting obs. Seems to also be a trend across other platforms with previously housing bearish players. Chicken little fog horning, complacency, bubble protection, call it what you will, but it’s very much reprogramming the Telephunken Spruikbot U-47!

      Is it StockHOME Syndrome? Two decade long recency bias (i.e. never has therefore never will tank)? Property advertising now paying the bills? Or are these players all now running share based funds that will be hit if interest rates rise rapidly?

    • Or maybe they just don’t want the vast destruction that will be brought on by rates going so high as it will be the poor who lose out from it all. Let’s say we get a major crash in housing, very few of the poor will benefit from this, they won’t have jobs, they won’t be able to borrow, and inflation will be structually higher anyway in the long-term.

      Blackrock and co on the other hand, well they can feast at the trough.

      There needs to be an alternative. I imagine that is what MB want, but, I don’t have any faith we’ll get one myself.

      • pfh007.comMEMBER

        There is an alternative and it is the same alternative that was available when folks were demanding interest rates be cut to zero.

        1. Give up on the idiotic idea of a deregulated bank cartel as a public money system.

        2. Regulate the provision of housing credit so FHBs have access to fixed cost loans for modest amounts

        3. End the ‘first user pays all’ model for new housing so they are rebated the GST and a large chunk of state and local levies on new development.

        4. Encourage investment in new housing by making them CGT free for the first owner investor.

        5. Provide a way for those who have made stupid financial decisions to exit their housing decisions quickly before they get worse ….and for some that may mean selling their asset and paying off their idiotic mortgages before prices fall too far. And that may include some compensation if they can demonstrate they were fooled rather than fools.

        But more of the same? More manipulated cheap money for asset price fluffing? Nope. We don’t need that.

        • The Penske FileMEMBER

          Who is paying for this “compensation” in your dream world scenario? How would you prove that you were fooled….. sign a declaration that you believed what spruikers were saying so the tax payer has to fix you up? Let the market sort itself out with the victims to be victims so when someone like me tells a 20 year old that I used to write 14% term deposits I don’t see “buffering” in their eyes.

          • pfh007.comMEMBER

            TPF,

            Yep that is the problem but keep in mind that what I was responding to was the proposition that the RBA should ignore inflation and cut rates in an environment where we know exactly what it will do ……just to protect a few chumps who can sell their debt juiced asset anytime they like.

            Bailing out a few hobos who can prove a genuine claim (I.e. about none) is going to be much cheaper.

      • Blue chip suburbs get whacked far harder. People living way beyond their means caused this and should not be protected. If that’s your definition of poor so be it. This working families, protect the poor garbage is growing old. Reality is no one’s ever given a toss about them and the growing wealth divide should demonstrate that. They’re hardier than you think.

        • pfh007.comMEMBER

          Jimbo,

          Yep, the reality is the family buyers who are not speculating will just stay put and pay the mortgage and tell their kids …never sail too close to the debt peddler wind.

          The cheap money crowd squealing about the RBA are moaning about their high income asset price bets going underwater not the roof over their heads.

          • GFC showed the smart move was to stop paying the loan and live rent free while stuffing your mattress with your earnings. In a major crisis banks don’t want to realise their losses. If your in negative equity and house prices collapse back to mean then you may be much better off after bankruptcy. Even easier to escape debt for the dual citizens, especially if there is high unemployment.

      • @mega64
        So you care about the “poor” now? Or you won’t be able to raise the rents on the “poor”?
        Nothing much h said as prices kept going up and up, no word on putting rates up then. Funny eh.
        Didn’t we just have a royal commission into the banks? So if you care about the poor you can maybe squeeze a poor family into your garage and feed them. Yeah, Didn’t think so……

  5. Heard of the concept of inflating away debt, the pending wage increases are going to devalue the actual value of all existing debt, and quite quickly at current CPI levels.
    Just as it is doing to the savings of retirees.

    • boomengineeringMEMBER

      Carey.
      True but the problem is by the time that happens it’s too late for most punters.

    • Wages go backwards in a recession. Falling real estate, less taxes for state governments, builders going bankrupt, reverse wealth effect feeding into services, rising interest rates sucking money out of the economy, while imported inflation reduces what you get for your money. We have gone from a world of QE free credit to QT credit tightening. Until the Fed turns there is nothing that can stop the debt pyramid from collapsing. Everyone is now competing for credit, meaning peoples savings now have value, and the world will compete for access to them via offering returns in the form of interest. So RBA must raise in line with the Fed to protect the banks from losing capital, which will also collapse the banks when property pops. Rock and hard place, without needing to entertain WEF great reset agenda, in which case central banks will “see market interference as a mistake” and let gravity reassert itself so that parasites can by assets for peanuts at the end.

    • Jumping jack flash

      “Heard of the concept of inflating away debt”

      Scomo and Joshy-boy had their chance to do this and blew it.

      And even though it looked like the US started going down this path with trillions of dollars of stimulus, “some other” agenda came into play and stopped it pretty much immediately.

  6. Anecdote – In the past few weeks my suburb’s local Facebook Group is seeing various tradies looking for extra weekend work. “Hey I’m a qualified plumber/builder/carpenter employed full time but if you need [blah] fixed/restored on the weekend give me a message”. I have never seen full time employed looking for extra weekend work on this Group, ever. But in the past fortnight there have been six of them that I’ve seen. I can only conclude that piling the first few rate rises on top of the cost of living inflationary spike is already pushing lots of household budgets to breaking point.

    • TailorTrashMEMBER

      Might be Metricon tradies
      That Metricon house in my area still deserted
      …had a closer look last week only half the roof tiles on

      • Just anecdata but all the big builders (Metricon, Clarendon, etc) around our way are never on site and the jobs seem to be on the go very very slow if at all. The local builders seem to be powering ahead – maybe they are cost plus or maybe just work job to job so have quoted properly??

        • Mate signed a construction loan with Metricon over 4 months ago. Slab went down quick enough and then nothing for 2 months or so. Last few weeks a bit of steel work went up then nothing. Metricon have quite a few properties going up in the same area so on week end he accosted one of the site supervisors who was responsible for other sites. Supervisor said they just can get materials even things like insulation. They need insulation for 30 homes but only get delivery for 7.
          My son works as a stubby for a major painting contractor – hasn’t heard from him for 3 weeks.

    • Spoke to a renderer at a function, who says it’s slowed quite markedly. Thought I’d get the nah, we’re flat chat standard response, which can come even in slow periods (an ego thing) but was very surprised.

    • UpperWestside

      This is because I have just returned to NY having spent 3 months in Sydney unable to get tradies to even return my call.
      Now that I am no longer in Sydney to supervise work the flood begins.
      Luckily, just before leaving Sydney I got the roof work done ( new roof, leaked while away and destroyed a new bathroom, hopefully now sealed).
      I am hoping that when I return in a couple of months there is a sea of tradies desperate to take my money.

  7. Jumping jack flash

    A decent analysis.

    Consider that i am currently able to repay a fair amount above my minimum repayment which means theoretically i am able to repay my mortgage sooner, however as minimum repayments increase it means that this will gradually revert back towards minimum repayment and lengthen the amount of time i am indebted for, and the amounts of interest that I pay to my bank.

    Also consider the immense demand destruction as jobs and incomes disappear as quickly as the debt and debt spending does.

    It is the demand destruction leading to lost jobs and lower wages that will have the greatest effect.

    • well kind of the point, with lowest unemployment rate in whatever many decades. The issue that is going to bite them is that they tried the whole “will not raise rates until wage growth is sustainably within ” then abandoned that as soon as CPI gave them a fright.
      Meanwhile, we have low unemployment, weak wage growth (go figure) and inflation is nuts anyway. All of their b.s. is showing they really have no control, the bond market is showing them anyway.
      They will have to get rates up and then get it back down once the crash happens. Here’s always been the fly in the ointment for most MB patrons – do they try and save it BEFORE or AFTER the crash? This time, thanks to inflation, I feel it is after the crash.
      Bailout coming, but not before the crash. Do anything before and the inflation monster starts grunting again. Who knew, the missing ingredient in that debate was actually what noone understands well – inflation (cept bcnichs off course).

      • I agree that this time is different. They are unwinding interest rates from 0 (a massive policy error) in the face of surging inflation. They don’t have the flexibility that existed previously to drop rates if there is a problem. The can can’t be kicked anymore.

        • Jumping jack flash

          The can was only being kicked by systematically lowering interest rates.

          As soon as the lower interest rate bound was hit they had two choices, inflate everything, or “pull it”.

          It seems they’re tending towards the latter, at least for now.

      • The difference is what type of inflation.

        Demand driven inflation is the kind the government likes. It erodes their debt while, if they direct the demand appropriately, appreciates the assets securing the debt. Buying mortgage bonds with printed money for example does the trick here.

        Cost driven inflation is the kind the government hates. Any excess money just increases prices of things more. They don’t have the power to control where the demand flows because the base demand in the economy for basic things is already enough to set off depreciating purchasing power. At least they can’t without impoverishing people with high taxes/duties. To keep inflation measurement the same the government must unwind services and local inflation which can reverse the benefits of demand pull inflation (see above).

        We had demand based asset inflation, while goods and services wages weren’t inflating. Now to make room for cost based inflation we need to depress demand accordingly or accept price rises.

        What people miss is that cost push inflation comes from more scarcity (energy, food, commodities, etc). In the end there’s less to buy and you have to proportion what’s left somehow. The magic money lever doesn’t change that. So you have two choices – do you keep the power of money the same and let assets, and other service demand fall, or do you keep that party going but drive the cost of goods up for the poor via higher CPI? Yes I realise the short term adjustment of higher interest rates will hurt the poor too while things reset, but in the end it will hurt asset holders/debtors I think more.

        • Jumping jack flash

          Exactly. The way i like to think of this is the value of the [debt] currency compared to the utility and inherent value of food and energy. As more money is magicked into existence then of course food and energy prices will rise accordingly.

      • Jumping jack flash

        “with lowest unemployment rate in whatever many decades”

        Unemployment rate is immeterial and a distraction.

        As soon as demand implodes from the halt in debt spending, unemployment will soar and wages on offer will collapse.

        Businesses dont employ staff for fun, they employ staff to service demand. They pay their staff wages which are taken from revenue. In this kind of economy that is driven by spending debt on services and imported retail goods, having no debt to spend will be catastrophic.