Servicing a mortgage will become more difficult for most households this year, but it is highly indebted recent first-time home buyers who will feel the pinch the most, according to ANZ economists.
Late last year, the Reserve Bank raised the official exchange rate (OCR) from the all-time high of 0.25% to which it had been cut at the start of the pandemic, to 0.75%.
But economists expect it to be raised another 25 basis points to 1.0% in this week’s monetary policy statement, and that is unlikely to be the last increase of this cycle.
ANZ expects the OCR to reach 3% by April 2023, provided the economy develops as expected.
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And that means the cost of most people’s mortgage debt will also rise.
While mortgage rates had already risen, for households with a fixed loan, there was a delay before the impact of the rate hike was felt, said ANZ’s chief economist, Sharon Zollner.
“The majority (71%) of mortgages are fixed or variable terms of less than one year, so the maximum impact on households should not be much later.”
Once loan terms started to roll over, mortgage holders would notice a difference, with the two-year mortgage rate up around 170 basis points from the middle of last year, for example. .
Zollner said there will always be instances where highly indebted households struggle with even moderate rate hikes.
This was especially the case if there had been an interruption to their income but, even if there had been none, inflation at 6% was now making a significant dent in household cash reserves, she said.
A recent Reserve Bank analysis showed that if mortgage rates rose to 5%, nearly 20% of recent first-time homebuyers would face mortgage issues.
At 6%, that would rise to almost 50%, and investors and some existing homeowners would also be under pressure.
But there were far more existing homeowners than recent first-time homebuyers, she said.
“These less recent buyers had realized significant capital gains, had repaid some of the principal and had generally seen their nominal income increase.”
Despite this, the market had to be viewed as a whole and ANZ’s forecast, with an OCR of 3% by April 2023, suggested that debt service as a share of revenue would rise from a low of around 5% at the end of last year to around 8% in December 2023.
That was about where things were in 2018, and well below the pre-GFC peak of 14%, Zollner said.
ANZ also ran the same interest rate scenario with the assumption of weaker household income growth than during the global financial crisis.
This showed a worrying shift in the burden of household services, but the household debt burden has yet only reached the pre-GFC peak, she said.
“A key element of our central forecast, which assumes household income growth of 5%, is that the burden of household debt will escalate over the next two years. But that starts from a very low starting point and will cap at a relatively low level.
Provided household debt does not increase, it would take significantly higher rates, with an OCR of 6%, and possibly an income shock, before households face a service burden of debt similar to those before the GFC, Zollner said.
“That’s not to say there isn’t debt concentration risk that the Reserve Bank needs to be wary of as it raises interest rates.
“Some home buyers have inherited or received their deposit and do not have particularly high incomes. Households in this situation, and perhaps those who derive income from hotels and tourism, will have a harder time in the years to come. »