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'Half of Australia is already struggling' as RBA poised to hike rates even more

Business

Interest rates were expected to rise again Tuesday as new data indicated that 4.6 million households were already facing financial pressures and things would only get worse.

 

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The Reserve Bank board is expected to lift its benchmark cash rate by between 0.25 per cent and 0.4 per cent at its meeting tomorrow. For a loan of $500,000 that will increase repayments over a 30-year mortgage by about $100 a month.

According to surveys by Digital Finance Analytics, large sections of the community were already struggling to cope with increased costs, but the biggest burden was being felt by the nation’s “battling urban” living on the fringe of the major cities.

DFA’s Martin North said 2.25 renters in Australia were struggling because of rent increases and general inflation. Overall, as many as 4.6 million households were under pressure “which is almost half the country.”

“That’s a pretty amazing number,” North said.

“While some households have increased their savings and are doing very well, the proportion of households in difficulty is rising very quickly.”

At the end of May, places like Toowoomba were really struggling, according to DFA data. About 60 per cent of households with a mortgage in Toowoomba were in stress. About 50 per cent of the city’s renters were also in strife and it has one of the highest rates of financial stress in the country.

But it wasn’t just the urban fringe that was impacted. DFA’s surveys also found that areas closer to the major cities were being hit and pinpointed Camp Hill as an area that was struggling.

Across Queensland, the DFA surveys show about 40 per cent of households with a mortgage were struggling. For renters it was 46 per cent and investors 24.5 per cent. Overall, 42 of households in those categories were struggling compared with 33 per cent in February 2020 before Covid hit.

North said policymakers don’t seem to understand the degree of stress or that it was accelerating.

“Frankly, from what I am seeing at the moment I would expect this to get worse,” North said.

“The proportion of households in difficulty is rising very quickly.”

The big struggle is among those who had bought a home recently, mostly on the urban fringe. About 77 per cent of those defined as young, growing families were in mortgage stress.

A key issue is the mountain of money many people have saved during Covid. Many economists believe this cash pile would allow people to deal with rising inflation and mortgage repayments.

According to Westpac economist Bill Evans, about $6 billion of that saved amount was unleashed by consumers in the March Quarter, but there was still a substantial pile stashed away that was almost double the “equilibrium” amount which was expected by the end of the year.

“That fall in the savings rate was likely to release a further $15 billion to $20 billion to support household spending through the year,” Evans said.

The State Government’s investment manager, QIC, said the increases in rates should not be as big as the financial markets were pricing in.

In QIC’s senior economist’s view released last week, it said that given the majority of the inflationary pressures appear to be supply-side factors (many of which are global), there was little ability for tighter monetary policy (rising interest rates) in Australia to have a direct impact.

The supply-side issues, which are increases in production costs, were also likely to ease over the next six to 12 months “allowing the RBA to partially look through their impacts and follow a more moderate course of rate hikes” than what financial markets expected.

It said the hike in rates was needed to take the heat out of the heat out of demand.

“On the other hand, it is not necessary for the RBA to raise rates so sharply as to push the economy into recession and completely offset the supply-side price pressures,” QIC said.

 

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