Call us on 1300 794 893

The Experts

Key barriers to interest rate hikes

Tim Lawless
February 15, 2017

Bookmark and Share

By Tim Lawless

The latest Reserve Bank ratios on household debt relative to household incomes highlights one of the barriers to higher interest rates. The data shows that the household debt to income ratio reached a record high of 186.9% in the September quarter of 2016, meaning that household debt levels are almost 87% higher than annual household disposable income.  

A significant component of household debt is attributable to housing debt. In fact, the housing debt to household income ratio was recorded at 132.2% in September, which is also a record high.  

While the cash rate is likely to remain low for the foreseeable future due to low inflation and below average economic growth, we can expect that, eventually, interest rates will rise from their current record lows.

Higher mortgage rates are likely to test the resilience of household balance sheets. CoreLogic measurements on mortgage servicing indicate that the average capital city home buyer will dedicate 36.4% of household income to servicing a mortgage. When mortgage rates do rise, it’s likely that households will be dedicating a larger portion of their incomes to debt servicing.  

Historically, 90+ day mortgage arrears rates have tracked well below 1% of Australian mortgage portfolios; this is likely to remain the case as households continue to service their debt obligations, despite higher interest payments. If this situation does occur, we could see household consumption muted as home owners sacrifice spending in other areas. 

We expect this to be a key scenario for consideration by policy makers when contemplating a future rise in interest rates. As to what extent households can withstand higher costs of debt without causing mortgage stress, and without creating an imbalance in household consumption remains to be seen.

Inflation currently remains below the RBA’s target range. Recently, the Reserve Bank stated that although headline inflation is likely to head back towards the target range this year, underlying inflation will remain below and take some time to return. Given this, increases to interest rates may be a distant prospect.  

Published: Thursday, February 16, 2017

New on Switzer

blog comments powered by Disqus
Pixel_admin_thumb_300x300 Pixel_admin_thumb_300x300