Households are generally well positioned to withstand interest rate hikes, but recent first-time homebuyers are particularly vulnerable to financial stress with the Reserve Bank poised to raise the cash rate in the coming months.
Reserve Bank Deputy Governor Michele Bullock said in a speech to the Australian Economic Society in Brisbane on Tuesday that most households had large reserves and capital in their homes, preparing for rate hikes through loans and low fixed rate savings.
The economy has been resilient, but with domestic price pressures mounting, the central bank said further increases in the cash rate were needed in coming months.
“How high and how fast the cash rate rises will depend on many factors, but in making this assessment, one of the areas the board will be watching closely is how households respond to the combination of rising interest rates and prices.” Bullock said. she said she.
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Overall, households were showing considerable resistance to higher interest rates, with $260 billion in savings since the start of the pandemic sitting in withdrawal lines or clearing and deposit accounts, coupled with strong price growth. of the house.
“The small drop in house prices in recent months has only marginally eroded some of the large increases seen in recent years,” said Ms Bullock.
“Even a 20 percent drop in house prices would only increase the proportion of balances in negative equity to 2.5 percent.
“This low incidence of negative equity reduces the likelihood that borrowers will default, as well as the size of the losses incurred by lenders if they did.”
Recent borrowers were more vulnerable to rate hikes and had less time to build up capital and liquidity buffers, Ms Bullock said.
Government policies to improve accessibility to the housing market for first-time homebuyers during the pandemic also mean they are more represented as recent borrowers.
“Historically, FHBs have tended to have persistently higher loan-to-value ratios and lower cash reserves than other borrowers, making them more vulnerable to a given home price or cash flow shock,” he said. Mrs Bullock.
“If the borrower were to experience a drop in income or an increase in expenses, it could be more difficult for them to repay the loan.
“And in an environment of rising interest rates, there is a risk that households with a high debt-to-income ratio will have a harder time paying down their debt.”
Ms. Bullock said that having a job was the best way to meet loan payments.
The latest rate decision came before record unemployment figures of 3.5 percent in June.
The Reserve Bank had previously indicated that the unemployment rate would not reach these lows until June 2023.
Unemployment is expected to put pressure on him to raise interest rates further when he decides on August 2 next.
The cash rate was raised 50 basis points earlier this month to 1.35 percent.