RBA decision likely to push more borrowers to their limit

In a decision that will surprise few economists – or borrowers – the RBA announced a further 0.25 percent rise in interest rates when it met earlier this afternoon. This brings the current interest rate up to 3.35 percent, a 3.25 percent increase since May last year.

Prior to today’s announcement, when the interest rate was still 3.1 percent, research by Roy Morgan released at the end of last month revealed that 23.9 percent of Australian mortgage holders were ‘at risk’ of mortgage stress in the three months to December 2022. Mortgage stress is where one third or more of weekly household income is going towards mortgage repayments.

In a tight rental market, mortgage pressure has also lead more landlords to pass rate rises onto tenants.

Research director at CoreLogic, Tim Lawless, says the latest rate rise moves beyond the ‘serviceability assessments’ some borrowers passed when applying for their loans.

“Since October 2021, lenders have assessed new borrowers on their ability to service a mortgage under an interest rate scenario that is at least 300 basis points above their origination rate,” he said. “The latest lift in the cash rate will push these recent borrowers beyond their serviceability tests.

“Considering most lenders were showing mortgage arrears to be around record lows last year, it’s likely some evidence of rising mortgage stress will start to emerge in 2023 under such substantially higher interest rate settings, with the potential for a more noticeable lift as further fixed rate borrowers migrate over to variable mortgage rates.”

Today’s decision signals the RBA’s continued efforts to use the cash rate to manage inflation, which sits at 7.8 percent annually. Time will tell whether it has been successful in curbing spending or whether, as many predict, there are more rate rises on the way. Mr Lawless said overseas economies could offer some hope to borrowers.

“Global inflationary pressures are easing, and domestically, a relatively weak December retail spending result could be the first clear sign that consumers are reigning in their spending,” he said. “Additionally, the housing component of CPI, which has the largest weight of any sub-group, dropped sharply through the final quarter of 2022, albeit from the highest level since the mid-1990s (outside of the impact from the introduction of GST in 2000).

“Mainstream forecasts for the cash rate reflect the uncertainty around inflation outcomes, ranging from the RBA holding the cash rate at 3.35 percent, through to another 75 basis points of hikes. However, a recent survey from Bloomberg puts the median forecast at 3.6 percent, implying one more hike of 25 basis points in the wings.”

Requiring more than 30 percent of household income to service a home loan has long been considered the benchmark for ‘housing stress’. Yet research shows it is becoming the new normal. The 2024 ANZ CoreLogic Housing Affordability Report reveals home loans on only 17 percent of homes are ‘serviceable’ if serviceability is limited to 30 percent of the median national household income.

Based on 40 percent of household income, just 37 percent of properties would be serviceable on a mortgage covering 80 percent of the purchase price. ANZ CoreLogic suggest 40 may be the new 30 when it comes to home loan serviceability. “Looking ahead, there is little prospect for the mortgage serviceability indicator to move back into the 30 percent range any time soon,” says the report.

“This is because the cash rate is not expected to be cut until late 2024, and home values have continued to rise, even amid relatively high interest rate settings.” ANZ CoreLogic estimate that home loan rates would have to fall to about 4.7 percent to bring serviceability under 40 percent.

CoreLogic has broken down the actual household income required to service a home loan on a 6.27 percent interest rate for an 80 percent loan based on current median house and unit values in each capital city. As expected, affordability is worst in the most expensive property market, Sydney.

Sydney

Sydney’s median house price is $1,414,229 and the median unit price is $839,344.

Based on 40 percent serviceability, households need a total income of $211,456 to afford a home loan for a house and $125,499 for a unit. The city’s actual median household income is $120,554.

Melbourne

Melbourne’s median house price is $935,049 and the median apartment price is $612,906.

Based on 40 percent serviceability, households need a total income of $139,809 to afford a home loan for a house and $91,642 for a unit. The city’s actual median household income is $110,324.

Brisbane

Brisbane’s median house price is $909,988 and the median unit price is $587,793.

Based on 40 percent serviceability, households need a total income of $136,062 to afford a home loan for a house and $87,887 for a unit. The city’s actual median household income is $107,243.

Adelaide

Adelaide’s median house price is $785,971 and the median apartment price is $504,799.

Based on 40 percent serviceability, households need a total income of $117,519 to afford a home loan for a house and $75,478 for a unit. The city’s actual median household income is $89,806.

Perth

Perth’s median house price is $735,276 and the median unit price is $495,360.

Based on 40 percent serviceability, households need a total income of $109,939 to afford a home loan for a house and $74,066 for a unit. The city’s actual median household income is $108,057.

Hobart

Hobart’s median house price is $692,951 and the median apartment price is $522,258.

Based on 40 percent serviceability, households need a total income of $103,610 to afford a home loan for a house and $78,088 for a unit. The city’s actual median household income is $89,515.

Darwin

Darwin’s median house price is $573,498 and the median unit price is $367,716.

Based on 40 percent serviceability, households need a total income of $85,750 to afford a home loan for a house and $54,981 for a unit. The city’s actual median household income is $126,193.

Canberra

Canberra’s median house price is $964,136 and the median apartment price is $585,057.

Based on 40 percent serviceability, households need a total income of $144,158 to afford a home loan for a house and $87,478 for a unit. The city’s actual median household income is $137,760.

RBA decision likely to push more borrowers to their limit

The latest hike is unlikely to be the last as inflation remains stubbornly high

New research suggests spending 40 percent of household income on loan repayments is the new normal