{"id":42219,"date":"2023-02-08T09:18:35","date_gmt":"2023-02-07T20:18:35","guid":{"rendered":"https:\/\/propertynoise.co.nz\/au\/?p=42219"},"modified":"2023-02-08T09:18:35","modified_gmt":"2023-02-07T20:18:35","slug":"how-much-pain-can-aussie-borrowers-tolerate","status":"publish","type":"post","link":"https:\/\/propertynoise.co.nz\/au\/how-much-pain-can-aussie-borrowers-tolerate\/","title":{"rendered":"How much pain can Aussie borrowers tolerate?"},"content":{"rendered":"

PHOTO: More than 15 per cent of mortgage holders are considered to be ‘At Extreme Risk’ when it comes to meeting repayments<\/strong><\/p>\n

REPUBLISHED WITH PERMISSION | API MAGAZINE<\/a><\/p>\n

As Australians grapple with yet another interest rate increase, API Magazine sought answers on who was most susceptible, how much more pain was in store, and when property markets might stabilise.<\/p>\n

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Aussies look to downsize as cost of living bites<\/a><\/h2>\n<\/header>\n<\/div>\n

So, just how much can Australia\u2019s increasingly stretched household budgets tolerate in the face of\u00a0borrowing costs rising at a record pace, pricier goods and services, and wages being corroded by inflation and flatlining for several years?<\/p>\n

While we\u2019re not at Global Financial Crisis (GFC) levels of mortgage stress, for the first time in this nine-month cycle of interest rate increases the proportion of mortgage holders now considered \u2018At Risk\u2019 of mortgage stress (23.9 per cent) is above the long-term average of 22.8 per cent stretching back to early 2007.<\/p>\n

The Roy Morgan data shows that mortgage stress, whereby households are spending more than 30 per cent of their income servicing their rent or mortgage, is increasing rapidly but is still well shy of 2009\u2019s GFC-induced level of 35.6 per cent (1,455,000 borrowers).<\/p>\n

A wide variety of experts, academics and industry professionals spoke to\u00a0API Magazine<\/em>\u00a0to shed some light on just how much pressure borrowers, renters and property markets could withstand or expect.<\/p>\n

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Property prices have been tipped by one major bank to fall by another 11 per cent this year, as interest rate hikes deter prospective buyers and sink home loan lending.<\/p>\n<\/div>\n

First home buyers were widely seen as those facing the most pressure, while renters looked set to be caught in the RBA\u2019s crossfire as collateral damage.<\/p>\n

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Perth-based CEO of Property Powerhouse, Garth Davis, said new and established buyers and investors were under pressure from rising interest rates.<\/p>\n

\u201cYes, some mortgage holders are ahead of their mortgage repayments and have built themselves up a cash buffer during Covid, however, there are now more than\u00a0a million mortgage holders under mortgage stress.<\/p>\n

\u201cFirst home buyers and people with the biggest percentage mortgages are the ones feeling it the most.<\/p>\n

\u201cProperty investors are also feeling the heat though, because even though rents are increasing, they are not going up enough to cover the pace of interest rate hikes,\u201d Mr Davis said.<\/p>\n

He pointed out that as investors were deterred from holding or acquiring properties, the rental crisis could be exacerbated.<\/p>\n

\u201cIf investors cannot continue to fund cash flow shortages on their properties, they will sell, and in most cases those properties get bought buy owner occupiers.<\/p>\n

\u201cWith increasing interest rates there will be investors selling, which means less properties to rent, which means rents keep going up.\u201d<\/p>\n

\"Mortgage<\/p>\n

Before this February rate hike, the number of mortgage holders considered \u2018Extremely At Risk\u2019, had increased to 666,000 (15.0 per cent).<\/p>\n

Miriam Sandkuhler, CEO and Buyers Agent, Property Mavens, said interest rate rises will lead to more distressed property sales.<\/p>\n

\u201cLike Sydney, Melbourne\u2019s trophy home section of the market has been hit hardest, with agents finding that selling multi-million dollar homes in areas like\u00a0Brighton,\u00a0Malvern\u00a0and\u00a0Toorak\u00a0is much more difficult,\u201d Ms Sandkuhler, the REIV Buyers Agent of the Year in 2021, said.<\/p>\n

\u201cBut at the other end of the scale, some affordable options are doing comparatively well thanks to increased interest from budget-conscious buyers, including established 20th century apartments in inner and some middle suburbs and entry-level houses in middle to outer suburbs like\u00a0Glenroy,\u00a0Albion\u00a0and\u00a0Reservoir.<\/p>\n

\u201cRegional markets are also feeling the impact.<\/p>\n

\u201cThe often over-estimated burst of new arrivals in 2020 and 2021 helped all regional markets, but the smaller centres are finding higher interest rates had led to a drop in buyer interest, which is biting hard.<\/p>\n

\u201cLarger regional centres\u00a0like\u00a0Ballarat,\u00a0Bendigo\u00a0and\u00a0Geelong will weather this year much better and, in our opinion, are well placed to ride the next upturn in the cycle.\u201d<\/p>\n

She also said renters were in for a hard time, with costs likely to soar another 10 per cent this as increased demand goes in search of for a decreasing number of listings, due to a return of international students, a slowdown in tenants becoming buyers and leaving rentals, and a drift of properties into the short-term accommodation market.<\/p>\n

The RBA had a delicate balancing act to complete, according to Kristle Romero Cort\u00e9s, Associate Professor at UNSW\u2019s School of Banking and Finance.<\/p>\n

\u201cThe RBA would reconcile the\u00a0cost of living\u00a0and the need to maintain price stability with potential gains from keeping interest rate levels low.<\/p>\n

\u201cMortgage owners will absorb the increased costs, and historically on average in Australia, housing costs are not too different to normal.<\/p>\n

\u201cExtremely low rental vacancy rates may actually mean there will be fewer distressed sales, as homeowners may choose to rent their property out rather than sell it.<\/p>\n

\u201cMost likely there will be a decrease in spending and consumption, but that is the intention of the rate increases,\u201d Ms Cort\u00e9s said.<\/p>\n

When will the rates pain be soothed?<\/strong><\/h2>\n

There is a growing consensus that more interest rates rises are imminent, but opinion varies on whether it will be as few as one or as many as six.<\/p>\n

Diana Mousina, Senior Economist, AMP Capital, said they expect inflation to fall to around 4 per cent by the end of the year, which is still above the RBA\u2019s preferred band of 2-3 per cent.<\/p>\n

Australian inflation looks to have peaked in the December quarter, which is later compared to our global peers.<\/p>\n

\u201cAustralian prices lagged the initial rise in global inflation because wages growth in Australia has been lower compared to global counterparts, energy prices rose late in 2022 and flooding in eastern Australia resulted in additional upside pressure on food prices, Ms Mousina said.<\/p>\n

\u201cThe RBA is better off pausing after the February meeting to assess the impacts of prior rate rises at a time when the inflation background is looking better.<\/p>\n

\u201cRate hikes are working \u2013\u00a0housing prices are falling, lending growth is negative, credit growth is softening and consumer spending is weakening.<\/p>\n

\u201cFurther rate rises risk slowing the economy too much,\u201d she said.<\/p>\n

\"Mortgage<\/p>\n

Mr Davis, of Property Powerhouse, said he expects another two rate hikes of 0.25%, peaking at 3.85 per cent around June. He added that the national property market would subsequently stabilise two or three months later.<\/p>\n

\u201cThe risk of distressed sales appears greatest in\u00a0particularly in areas of high value mortgages, that being\u00a0Sydney,\u00a0Melbourne\u00a0and\u00a0Brisbane.\u201d<\/p>\n

Luke Parker, Director of OP Properties in Perth, said the interest rate peak was nearby.<\/p>\n

\u201cWe are now seeing very real impacts on the economy the result of record rate rises and we know that rise takes about six months to actually flow through mortgages and the wider economy.<\/p>\n

\u201cThe Reserve Bank needs to take some time to allow the full effect of rises to date to be known, as it\u2019s much easier to tip the economy into recession than it is to kick start it again,\u201d he said.<\/p>\n

He pointed to employment and labour shortages as one of the underestimated factors in taming inflation.<\/p>\n

\u201cThe elephant in the room with regards to the national inflation story is that the economy is beyond full employment, so it wants to grow but there isn\u2019t the labour to support this growth.<\/p>\n

\u201cThis means the cost of labour goes up because companies are poaching from each other, however, there is no actual increase in output, so everything just gets more expensive.<\/p>\n

\u201cIt\u2019s a pressure cooker.<\/p>\n

\u201cAs the effect of increased overseas migration flows through the economy, the wheels will begin to turn again and this in itself will have a significant cooling effect on inflation.<\/p>\n

\u201cHopefully, the record rate rises don\u2019t completely crush investment by this time or else we\u2019ll see a spike in unemployment and be in recession.\u201d<\/p>\n

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