Aussie households leverage recklessly into housing market

The Reserve Bank of Australia (RBA) has updated its household finances data for the March quarter, which presents the financial position of Australian households at the housing market’s peak just one month before the RBA commenced hiking rates.

As shown in the next chart, the value of Australia’s housing assets hit an all-time high 6.6 times household disposable income in the March quarter – up significantly from the pre-COVID level of around 5.1 times incomes:

Australian housing values to income

The rise and rise of Australian property valuations.

This rise in housing values was associated with an escalation of mortgage debt, which hit a record high 144% of household disposable income in the March quarter, in turn driving the ratio of household debt to income to an all-time high 187% of income:

Australia's household debt

Australia’s mortgage and household debt hits record highs.

The inexorable rise in house prices and debt was driven by the cratering of mortgage rates, which lowered the cost of servicing debt and enabled Australians to leverage-up.

As illustrated in the next chart, interest payments on mortgages fell to a 22-year low of 4.4% of disposable income in the March quarter, whereas interest payments on total household debt fell to an all-time low 5.2%. However, because the sticker cost of housing has risen so sharply, total principal and interest repayments have not fallen as sharply; albeit were at around 2003 levels in the December quarter of 2021 (green line below):

Australian household debt repayments

Australian household debt repayments shrunk as interest rates hit rock-bottom.

The above data obviously represents the turning point. In May, the RBA commenced its rate hiking cycle with its initial 0.25% increase, which was followed by another 0.5% hike in June.

The futures market tips that the official cash rate will lift to 3.15% in December before hitting 3.75% in June 2023. If true, this would push the average discount variable mortgage rate to 7.1%, which would be more than double its pandemic low of 3.45%:

Australian mortgage rates

Australian mortgage rates to double!

In turn, average principal and interest mortgage repayments would soar by around 50% from their level immediately before the RBA’s initial 0.25% rate hike – representing the highest debt repayment burden in the nation’s history.

Given both housing valuations and debt were at their highest levels ever in March, this means Australians have never been as sensitive to interest rate hikes. Thus, any aggressive lift in interest rates by the RBA is certain to cause extreme financial pain and could drive a major house price crash and recession.

Australian households’ extreme debt loads necessarily mean that the RBA must tread very carefully on rates.

Unconventional Economist
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Comments

  1. This is going to be the crash of all crashes
    You don’t want to be in the way when.this ship goes down
    It is going to be absolute debacle
    Big sales in 2nd half of 2023
    But the big big sale will be 4 to 5 years out when IR are 20s% & inflation is in the 30s%
    You guys can see what these fcwits are doing. can you imagine inflation up at 20s & 30s, you can see now how poor you become
    At 25% mortgage rates it won’t be that exciting going to an auction
    You’ll have to buy with other forms of money, think vendors will want to settle in gold at that point probably. Who knows

    • Your predictions seems very Armageddon. But what are your thoughts on where to but your cash of you hold cash and should you move your super into ffixed interest? When will interest rates start going back up again to these highs of 20% which has never been seen before in Australia’s history. So really how to survive this?

      • ErmingtonPlumbingMEMBER

        Firearms, large dogs and having local friends and family at hand happy to engage in acts of reciprocal extreme violence against others is probably the best strategery for survival.
        That and thousands of cans of Baked beans of course.

      • We have had 20% interest rates in the 1980s in Aust

        All I’ll say is in the Armageddon financial planners will move from equity losses to fixed income for a safe haven & then will proceed to lose the rest of their clients money as rates rise

        Most people will lose 60 to 90% of their wealth over the next 2/3 years and longer

        Similar to 1930 most will get wiped out

        Baby boomers the worst

        Many boomers will have to live with their kids …….the list just goes on.

      • They will have to let a lot of the debt go to money heaven……..it won’t happen fast, but it will be faster than last time………the rates now seem to rhyme with 1957 and you can see the drop in rates the next year and you can see what happens over the next decade…..Treasury Notes are a better bet than fixed interest but they may stop issuing them to force people into bonds. On the other hand they will need our savings so we might get Australian Savings Bonds again…….you still lose to inflation but you get to set the entry point a lot better. Credit is going to be tight an alien idea to most people.

        https://twitter.com/profplum99/status/1542149121875771393

      • He sounds like a right nutter… like all the con $ piracy freaks banging on about Klaus Schwab of the World Economic Forums (private institution) Great Reset.
        Surely Dan Andrews , Scott Morrison, Jacinda Ardern, Macro, Trudeau, Anthony Albanese & associated politicians & medical, scientific, media & economic folk around the world are not bought into bulging (auto correct cos it’s a [email protected]) buildi back better?
        Why let the opportunity slide for cashless trans actions & Trusted Digital Identity Legislation? Giddy up:)

    • If things go pear shaped, but not as armageddon as you say bcnich, my 2c as to what you can do (this is not advice, etc):
      * Don’t have any debt (ie pay off what you can ASAP)
      * Own your home
      * Have a buffer in case you lose your job
      * Grow your own food, have access to food (barter community, etc), learn to cook and eat simple, cheap foods
      * Have a useful skill/trade you can barter and/or will be in demand for cash jobs
      * stock up on essentials (yes this may include Baked Beans)

      Some of these you can’t sort out quickly but you can prepare for. Where it gets interesting is if after the above you have cash where do you put it. In my mind if it’s large you spread it around but I would go primarily with the large yellow place. They have the most punters and IMO if the gov was to step in that’s the one they won’t let fail. (disclaimer – I previously worked for one of the red places).

      Just my 2c and defn not advice. Happy for others to disagree or add to this.

      • I mostly agree with you but I do wonder why the option of a safe or vault gets so often overlooked.

    • DingwallMEMBER

      For some reason I am picturing you in a self made bunker, gold bars lined up on one wall, tinned goods on one and water bottles on the third…… a corner is covered in screens keeping an eye on things including to make the occasional foray onto MB to drop some sage advice…… not quite sure though if you have the archetypical homemade aluminium foil hat or not.

    • Jumping jack flash

      I agree with pretty much everything.
      The increased debt servicing costs from the rising interest rates, less debt expansion from the rising interest rates, and subsequent demand destruction from the reduction in debt spending, will be a three-pronged attack at the very foundations of ours, and almost all of the developed economies.

      And that’s not even considering the continued inflation of all essential living expenses, either through constrained supply, or simply price gouging, which will act as the catalyst for continued interest rate rises even though everything is turning to the proverbial.

      Its going to be a fun ride.

  2. pfh007.comMEMBER

    The RBA will certainly tread carefully but controlling inflation is it’s single most important job. Which means that as long as inflation is above the range the RBA will be fighting it and fighting it with interest rates.

    Now sure, if their efforts are successful they will be able to stop raising rates but there is absolutely NO guarantee that causing pain to some of our household debt hogs will reverse inflation.

    In fact that seems very unlikely as about 30% don’t have a mortgage over their home and about another 30% don’t own a house. So we are talking about some fraction of 30% who have a mortgage that is recklessly large.

    Even if that fraction and their FIRE sector enablers howl like banshees the critical question is whether their pain can stop inflation.

    That seems very unlikely?

    So what will exert deflationary pressure?

    1. Crunching money creation by our private bankers…….that is exactly the point of raising interest rates.

    If you want the value of money to rise, creating less of it is a good place to start and 95% of it is created by the bankers when they peddle debt.

    Why anyone would object to discouraging banker debt peddling to vulnerable households is a mystery.

    After that big daddy of inflation control there are many other things that can direction push down on prices. Most don’t involve the RBA.

    1. Loads of cheap imported labour to increase unemployment towards 10%

    2. Export controls on energy to force producers to sell cheap locally

    3. Productivity improvements by investing productivity. Yes I know that is alien in Australia.

    4. Getting rid of red tape that drives up costs for no particular benefit.

    Moaning that the RBA should ignore inflation to support the FIRE sector and its victims is lunacy. It will not happen.

    The victims need to sue their debt peddlers and their enablers……if anyone OR sell their assets and pay back THEIR debts.

    • Strange EconomicsMEMBER

      So the current Government review will be tasked to simply just change the RBA mandate to remove inflation targets,
      (and target to be maintain house prices) or ” full employment”.
      No need for higher interest rates then, in fact stimulus will be needed, as the other hand of government encouraging mass immigration will soak up job growth.
      House market saved.

    • Jumping jack flash

      “Moaning that the RBA should ignore inflation to support the FIRE sector and its victims is lunacy. It will not happen”

      *Might* not happen.

      We will see what they do once the RBA’s beloved banks start to collapse. “Inflation” is so malleable, they’ve redefined it before, they can do it again.

      And consider that it only took a couple of failing banks for them to reverse course back in 2008-10.

      • pfh007.comMEMBER

        JJF,

        The banks will not collapse.

        They will just sell chunks of their loan books to the RBA and receive a nice fat credit to their RBA reserve accounts.

        They will be appointed as agents of the RBA to manage the loans and the RBA will just hold their new “AAA assets” for as long as it takes.

        Has the Fed still got a cupboard full of Freddie and Fannie paper?

        • Jumping jack flash

          “Has the Fed still got a cupboard full of Freddie and Fannie paper?”
          Probably.
          I’m pretty sure the banks still own most of Detroit as well and it will never come onto the market. Ever.

          But my point was that they probably don’t want that to happen, so they’ll reverse course like they did back then. Or at least try to.

  3. reusachtigeMEMBER

    Good on people for gearing up into Australia’s best investment class ever!

    • Exactly that helps the smart ones that will have their choice as the ones in so much debt get crushed
      Going to be the sale of the century
      Like going shopping at a property DFO

      • boomengineeringMEMBER

        Put the factory on the market this morn (signed ) after much badgering from the agent with 2 keen buyers willing to pay more than I think it’s worth. I year lease back to move stuff out. Problem is where do I put the cash if it sells.

        • 2023HomelessMEMBER

          I’m grappling with this decision also…sold my house, soon to be sitting on cash when it settles in 10 days.

          I’m going to probably take a more risky punt. Half in gold immediately. Will wait for a US recession to materialise and some signs of inflation temporarily down and more QE. Invest the rest temporarily in shares at this point. With a very close eye for any signs of up ticking inflation. Then liquidate the shares.

          From there? No idea what to do. Maybe more gold, Heinz and defence/gun shares?

    • Reusa CBA 5 year fixed rate home loan interest rate is 6.84% this morning
      Big rises in fixed rates coming
      I said a year ago we’d see 5% fixed, I didn’t think we’d see 7%
      The free market is pushing rates up, RBA is just a patsy
      They should really do 0.75 p% to 1% in July same August
      I think they’ll follow FED & hike 0.75% next week & another 0.75% Aug

      If they don’t the RBA are a joke

      They should have slowed things down a year ago

      That’s when macrobusiness said there was no inflation, it was all made up

      Think actually MB said home loan rates would go negative in early 21

      • Yeah, well, maybe that’s just, like, your opinion, man.

        You’ve said so many things, often contradictory, only an idiot would still pay attention…
        Attention seeker, exhibitionist, what’s your situation?

        • Jumping jack flash

          It is understandable that contradictory things could be said. There’s [at least two] powerful global forces at work.

          Like I’ve mentioned before, only a few months ago it really looked like they were preparing for the mother of all inflation to inflate away the debt. The plan seemed to be that everyone gets paid 6 figures and a regular coffee is $30, but your [multi] million dollar debt shrinks comparatively.

          They kicked off the inflation with a few trillion dollars of global [COVID] stimulus, declared the resulting inflation “transitory”… they even kicked off wage inflation by raising minimum wages (although there was some lag while that policy was being pushed through). And then quite suddenly, and completely from left of field, someone or some group of people decided, “nah, let’s pull it”, and so the interest rates started rising.

          Banks are never going to complain about higher interest rates. In fact they’ve been complaining for a while now that interest rates were too low. QE and NIRP and all those other recent shenanigans are not something any self-respecting bank would usually consider as sound policy, these are all basically government bribes so banks don’t raise interest rates.

          Both these opposing forces are currently in play due to the policy overlap. Wages are just starting to inflate as a result of the stimulus and inflation, and that’s why retail figures are still looking good for the moment, but all that will be quickly shut down by the coming demand destruction as the debt stops inflating and being spent, and the existing wad of debt becomes more expensive, and most people lose their jobs.

          • Agree. Usually, it’s not even what you say, but how you say it.
            With the Doomsday Dope (aka Solar Sage) it’s all about drama & hyperbole,
            swinging from one fringe scenario to another, often inside the same post.
            Big effing deal if the rates are going one way or another. Some will default, some may be better off.
            Many (like myself) couldn’t give a fvck.
            But, the attention seeker feels that this is his moment in the Sun (it’s all about the Sun with him).

        • Mr.Tezza BCNich has been more right than this site oftentimes maybe you would like to take that into consideration while judging him

          • If you keep carpet-bombing with your predictions, eventually some of them will turn out right.
            Again, it’s not so much what he’s saying, but the style how he says it.
            So, it’s going to be the end of the word? Good, get lots of popcorn and enjoy.
            On the other hand, if the disaster can be averted, then it almost certainly will.
            But, the attention seeker is really craving for something. Recognition, respect?