Source : THE AGE NEWS
The prevailing narrative about high interest rates being a major culprit in the cost-of-living crisis is no longer passing muster – if anything, the rhetoric is showing major cracks, suggesting that what borrowers are perhaps experiencing is phantom pain.
The latest data from major banks shows that more than 90 per cent of mortgage customers didn’t seize on the February interest rate cut to reduce their monthly payments. Instead, the vast majority of borrowers opted to stick to the higher repayments so they can pay down their home loan faster.
For National Australia Bank, more than 95 per cent kept repayments at the same level, and in ANZ’s case, 93 per cent of its customers did the same. At Australia’s largest lender, Commonwealth Bank, the equivalent percentage was 86 per cent.
Most borrowers did not lower their repayments after the RBA’s February rate cut.Credit: Peter Rae
Only a small minority of customers were significantly stretched to a point where they needed to reduce their monthly repayments. This is despite the February cut, which brought the interest rate down from its highest level since 2011.
And despite the higher rates, the level of bank arrears on mortgages in Australia remains below the long-term average.
Another thing to remember, is that many of these borrowers had taken out their loans when rates were far lower and have since been dealing with the sticker shock of rates ratcheting up.
But the bulk of borrowers in Australia are clearly coping well enough with repayments, in large part because they have jobs. And bear in mind that there are some pockets of stress among borrowers and the two rate cuts announced this year will not go far enough to give them the breathing room they need.
The RBA’s May rate cut, announced on Tuesday, will be passed on by all major banks over the next couple of weeks, and it will be fascinating to see if the repayment/paydown pattern remains the same.
The one thing to remember when assessing the level of interest rate stress across the community is that the pain isn’t shared by all. Only a third of us have a mortgage, another third has already paid off their houses and are insensitive to interest rates.
Those hit hardest by the cost-of-living issues tend to be renters on lower incomes and those unable to get a foothold in the property market.
It all backs up the message delivered by the Reserve Bank governor Michele Bullock on Tuesday that the harmful virus contributing most to the cost-of-living crisis is inflation. And the central bank remains prepared to keep rates elevated if needed to serve as an antidote to this far more sinister menace of inflation.
The good news is that this inflation is now back inside the RBA’s target band, prompting economists to predict that we may see another one or two rate cuts this year. And with falling rates, the thorny issue of house prices will come roaring back into the picture.
RBA governor Michele Bullock.Credit: Louie Douvis
For her part, Bullock is not willing to cop any heat for the potential jump in house prices – making it very clear that the current crisis is fed by a supply/demand imbalance, and that lack of supply doesn’t fall within the central bank’s remit.
Two schools of thought are emerging from economists. One is that the rate cuts will stoke demand, and prices will move up this year and next. And we have seen evidence of this in previous rate-lowering cycles.
Analysis from Canstar shows that the borrowing capacity of a couple on an average full-time wage will increase by $23,000. Meanwhile, HSBC economist Paul Bloxham said the bank continued to expect low, single-digit national housing price growth in 2025 but now forecasts a stronger upswing to housing price growth of 4 to 9 per cent over 2026, compared with its previous forecast of 1 to 6 per cent growth.
Against this, there is another school of thought that house affordability is so stretched that demand won’t pick up significantly and nor will prices.
Capital Economics’ head of Asia Pacific Marcel Thieliant says that with housing affordability still extremely stretched, he expects house price growth to remain muted even as mortgage rates are set to fall further.
But the recent results from the big four banks demonstrate that people are still borrowing to buy houses at a healthy clip (even before the latest rate cut).
There is clearly a cohort that is experiencing mortgage stress and pain. But the narrative that mortgage stress is crippling most borrowers needs to be amended, given much of it seems to be phantom pain.
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