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Recent homebuyers and the those that are highly indebted are vulnerable to the interest rate rises that the RBA has confirmed today are inevitable.
Delivering her first major speech since being appointed in April, Reserve Bank Deputy Governor Michele Bullock made it clear that borrowers could expect to be hit with a string of further interest rate hikes in the coming months.
Her speech in Queensland to the Economic Society of Australia was titled How Are Households Placed for Interest Rate Increases? and she went on to answer her own question by saying “households in aggregate are well positioned and their balance sheets in very good shape.”
“The high level of debt held by Australian households might, on its own, suggest that many households will face difficulties as interest rates rise, with implications for their ability to service that debt, consumption and the economy more broadly, however, there are a number of factors that suggest considerable resilience in the household sector to rising interest rates,” Ms Bullock said.
“First, aggregate household balance sheets are in very good shape.
“While households have high levels of debt, this is accompanied by sizeable holdings of assets.
“Strong growth in housing prices over 2021 and early 2022 has boosted asset values for many homeowners, with housing assets now comprising around half of household assets.
“The small decline in housing prices in recent months has only marginally eroded some of the large increases seen over past years.”
“Furthermore, households have saved a large amount of money since the onset of the pandemic – around $260 billion and these savings have been put into redraw facilities as well as offset and deposit accounts.”
But she also stressed that not all households were the same and some are very vulnerable to rising interest rates.
Stress ahead for some
She singled out higher income households with similarly high debt levels, first-home buyers, recent home buyers, and other overly indebted households as being at greatest risk.
Inflation was also acknowledged as a source of stress for indebted households, as their earnings were eaten away by higher prices.
“If we look at the households that have debt, almost three-quarters of debt outstanding is held by households in the top 40 per cent of the income distribution; indebted households in the bottom 20 per cent of the income distribution hold less than 5 per cent of the debt,” Ms Bullock said.
“Higher income households can typically devote a higher share of their incomes to debt servicing because their other living expenses tend to account for a smaller share of their income, which suggests that a large number of households are likely to be able to handle somewhat higher interest rates.”
“Recent borrowers are more vulnerable than earlier cohorts, as they are more likely to have borrowed at high debt-to-income ratios, have had their serviceability assessed at lower interest rates (albeit with larger interest rate buffers) and have had less time to accumulate equity and liquidity buffers.
“Government policies to improve housing market accessibility for first home buyers (FHBs) during the pandemic also means that FHBs are more highly represented among this group of recent borrowers than they are in earlier cohorts.
“Historically, FHBs have tended to have persistently higher LVRs and lower liquidity buffers than other borrowers, making them more vulnerable to a given house price or cash flow shock.”
MORE TO COME SOON
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