Repayments now ‘almost 10%’ of household income: RBA

In an address to Bloomberg yesterday (11 October), Reserve Bank of Australia (RBA) assistant governor (financial markets) Christopher Kent revealed that required household mortgage repayments (interest plus scheduled principal repayments) have increased “around 7 per cent” of household disposable income to almost 10 per cent since May 2022.

According to Mr Kent, these figures sit above estimates of the peak reached in 2008 when the cash rate sat at 7.25 per cent, with required payments for households with a large mortgage eating into a higher share of their income.

“Required payments will continue to rise a little further in the period ahead as fixed-rate loans taken out during the pandemic reach the end of their fixed-rate period,” Mr Kent said.

“The share of such loans has already fallen substantially, from close to 40 per cent in early 2022 to about 20 per cent today.”

Additionally, borrowers have begun cutting back on spending to meet these higher mortgage repayments, while feeling the crunch from “rapidly rising living costs”, leading to slower growth in demand for goods and services, according to Mr Kent.

However, Mr Kent noted that households that have savings are now earning more and could spend more as a result, acting as a counterbalance to households that are spending less, to an extent.

“However, the stock of household debt in Australia is larger than the stock of household savings,” Mr Kent said.

“Since rates have been rising, the contribution of interest received by those with savings to the growth of disposable income has been noticeably smaller than the extra interest payments made by those with debt.

“Moreover, people with savings typically spend less of each extra dollar they earn than those with debt, so any additional spending associated with extra interest received is not enough to offset the reduction in spending associated with extra interest paid.”

He added that the RBA’s estimates suggest that household spending has reduced “by around 0.4–0.8 per cent per year through the cash flow channel” as a result of the 400-bp increase to the cash rate since May last year.

The RBA previously projected that scheduled mortgage repayments will “increase to a historical high” of approximately 9.8 per cent of disposable household income by the end of 2023 in the Statement on Monetary Policy (August 2023).

The central bank added that this will hit a “new record” of 10.1 per cent by the end of 2024, based on the cash rate rises to date.

Banks passing on rates

Australian banks have passed on “about 75 per cent” of the increases to deposits, in line with past phases of rising interest rates, according to the assistant governor.

He further noted that the extent of the pass-through to deposits has been “relatively high” when compared to other economies such as New Zealand (around 50 per cent) and the United States (around 35 per cent).

“Among other things, this difference may reflect Australian banks’ focus on variable-rate borrowing and lending,” Mr Kent said.

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