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Why the RBA must get inflation under control and save households more pain

Business

The Commonwealth Bank has warned that looming mortgage rate increases were likely to have a severe impact on households because of the huge amount of debt that has been accrued.

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The bank’s head of Australian economics Gareth Aird said mortgage lenders would be forced to hike rates above any increase from the RBA’s benchmark cash rate given the cost of funds had increased, adding an increased impact on home owners.

Also looming in the background was a huge amount of fixed-rate mortgages that would soon need to be refinanced in a period of rising rates.

The bank expects that about $500 billion in fixed rate mortgage loans would expire over the next two years and the average interest rate on those loans was between 2.25 per cent and 2.5 per cent, which was below where rates were likely to be later this year.

He said increases in the bank’s benchmark cash rate would be very powerful given the high levels of household debt in Australia.

The CBA’s current thinking was that the cash rate would peak at 1.25 per cent, which would take repayments to about 15 per cent of disposable income, about the average for the past 20 years.

But the financial markets had already pencilled in a cash rate of 2.5 per cent within 18 months.

“Our work indicates that a cash rate of 2.5 per cent would take mortgage repayments to their highest level of record as a share of household disposable income,”Aird said.

“The record amount of household debt as a share of income means the impact of rate hikes on the household sector is greater than any other point in time.”

The previous peak was the 17.6 per cent share of disposable income just before the global financial crisis.

Aird said that the bank’s current forecast was for a fall in house prices nationally of 8 per cent in 2023, which he believed would not have a material impact on the economy.

“However, we would expect bigger falls in home prices if the RBVA was to take the cash rate higher than we currently anticipate (and) larger falls in home prices would have a negative impact on the economy,” he said.

 

 

 

 

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