Last week’s National Press Club address by Reserve Bank of Australia (RBA) governor Philip Lowe included this chart showing that the rise in mortgage rates in Australia has been more severe than most other developed nations:
Australia’s rapid increase in average mortgage rates comes despite the RBA increasing official interest rates by less than those same central banks:
The 3.50 per cent rise in Australia’s official cash rate is dwarfed by New Zealand, whose own Reserve Bank has increased its cash rate by 5.0 per cent over this cycle.
Yet, average mortgage rates in Australia have climbed by around 210 basis points, versus around 160 basis points in New Zealand.
Dr Lowe explained the oversized mortgage rate increase in Australia is due to “the predominance of variable-rate mortgages”, which “means this is a more powerful transmission mechanism of monetary policy than in many other countries”.
The majority of home loans in New Zealand are set at fixed rates.
In the US, mortgage rates are typically set for the full loan period of 30 years, which is why the US isn’t even included on the RBA chart above.
The upshot is that mortgage holders in most other nations are not impacted to nearly the same degree as Australians when official interest rates rise (or fall).
Australians are drowning in debt
To add further insult to injury, Australian households carry the second largest mortgage loads in the world behind Switzerland.
The chart below plots the ratio of household debt to the size of the economy (gross domestic product) across English-speaking nations and shows Australia is well in front of its peers:
Data on actual debt repayments (principal and interest) is more limited, but shows that Australian households have the highest debt servicing costs out of the nations surveyed by the Bank for International Settlements (BIS):
The above data from the BIS is only current to the September quarter of 2022. Therefore, it misses 1.25 per cent of additional rate hikes from the RBA and the associated lift in debt repayments.
Mortgage repayments will continue rising
Most economists believe the RBA is either at or close to the peak of the interest rate tightening cycle.
However, this does not mean that average mortgage rates will stop rising. On the contrary.
The pandemic was unusual in that over the 18 months to December 2022, nearly half of all borrowers took out fixed rate mortgages, up from one-fifth pre-pandemic.
Most of these mortgages are scheduled to expire over the remainder of this year and will see borrowers shift from ultra cheap fixed rates of around 2 per cent to variable rates above 5 per cent.
The next chart from the Australian Bankers Association tells the tale.
There are more than 600,000 fixed rate mortgages across the big four banks alone that will expire over the quarters ending in June, September and December:
In turn, average mortgage rates will continue to rise across Australia, even without further official rate hikes from the RBA.
Indeed, Betashares chief economist David Bassanese told The Australian last week: “The higher than usual expiry of fixed-rate mortgages over the coming two years will result in de facto policy tightening (at least on the mortgage sector) equivalent to around one-third of the policy tightening already seen over the past year”.
That’s the equivalent of around five 0.25 per cent rate hikes that are still to flow through to mortgage holders.
The impact of the fixed rate “mortgage cliff” is illustrated in the next chart from this month’s RBA Financial Stability Review:
It shows that scheduled mortgage repayments will lift to an all-time high share of household income once the fixed rate mortgage reset runs its course.
Viewed in this light, the RBA was justified in pausing rates at this month’s monetary policy meeting.
There is already substantial tightening ‘built-in’ owing to the fixed rate “mortgage cliff” and Australian households are facing a record increase in debt repayments.
Leith van Onselen is co-founder of MacroBusiness.com.au and chief economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.