The Reserve Bank of Australia (RBA) has lifted the official cash rate by 4.0 per cent in only 13 calendar months, which is the steepest and largest monetary tightening in the nation’s history.
According to independent economist Tarric Brooker, the RBA’s rate increases have lifted mortgage interest repayments an unprecedented 121 per cent, which would grow to 138.5 per cent if the RBA hikes rates a further two times.
The pain being inflicted on Australian mortgage holders is unlike anywhere else in the world.
The RBA has increased official interest rates by less than the central banks in other English-speaking countries.
But because most Australians are on variable rate mortgages, the increase in average mortgage rates has been far higher in Australia.
According to the RBA chart above, Australian mortgage borrowers had incurred more than 200 basis points of mortgage tightening as at February, which was significantly higher than other English-speaking countries.
The 4.00 per cent increase in Australia’s official cash rate is dwarfed by New Zealand, whose own Reserve Bank has increased its cash rate by 5.25 per cent over this cycle.
Yet, the above RBA chart shows that average mortgage rates in Australia had climbed by around 210 basis points, versus around 160 basis points in New Zealand.
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.
In short, mortgage holders in most other nations are not impacted to nearly the same degree as Australians when official interest rates rise (or fall).
Australian households battered and bruised by the RBA
The Bank for International Settlements (BIS) produces a series measuring aggregate debt repayments (principal and interest) against aggregate household disposable income across a selection of economies.
As shown in the next chart, Australian households spent 16.3 per cent of their disposable income on debt repayments at the end of 2022, up from 13.5 per cent in the March quarter before the RBA’s first rate hike:
The rise in debt servicing costs in Australia has also dwarfed the other English-speaking nations sampled by the BIS.
The official Australian cash rate was 3.10 per cent at the end of 2022.
Accordingly, the above chart does not include an additional 100 basis points of hikes nor the expiry of fixed rate mortgages, which has increased debt repayments further but is not reflected above.
It is also worth pointing out that just over one-third of Australian households carry mortgages, which is why only 13.5 per cent of aggregate household income was being dedicated to debt repayments at the end of 2022.
The impact on households carrying mortgages has obviously been far greater.
Indeed, the burden of the RBA’s aggressive monetary tighten has fallen almost entirely on these mortgaged households, not the broader population.
Australia’s mortgage pain will intensify
The situation facing Australian mortgage holders will only worsen from here.
First, the RBA is expected to lift interest rates further over coming months, which will obviously lift repayments higher.
CBA’s economics team now expects one further 25 basis point increase by the RBA in August to a peak rate of 4.35 per cent – with a potential additional rise in July if data permits.
Westpac, ANZ and NAB each forecast a cash rate peak of 4.6 per cent, with the RBA tipped to hike by 25 basis points in both July and August.
Second, there are still nearly 500,000 fixed rate mortgages that will expire over the remainder of this year, which will see borrowers reset from mortgage rates of around 2 per cent to variable rates approaching 7 per cent (higher if the RBA continues to hike).
This means that average mortgage rates will continue to rise across Australia, even without further official rate hikes from the RBA.
In this regard, the next chart from CBA’s economics team is instructive. It is based on RBA modelling and shows that average debt servicing costs will lift to an all-time high share of household income in 2024.
These repayments will dwarf what mortgage holders abroad are paying, which is why Australia is the worst country in the world to be carrying a mortgage.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.