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Speaking to journalists on Tuesday (22 February), Mark Hand, ANZ group executive for retail and commercial, Australia reflected on the looming cash rate movements from the Reserve Bank of Australia (RBA).
The major banks have predicted August or September will be the month in which the RBA will first raise rates. CBA has tipped the rise could come as soon as June, while ANZ has leaned towards September in its last forecast.
It has been more than a decade since the RBA last increased rates, since it stepped it up to 4.75 per cent in November 2010. Since then, there has been a series of declines to its current record low of 0.1 per cent.
In anticipation of the rate moving up, ANZ economists have recently echoed the RBA in predicting borrowers will weather the change. They have pointed to home owners building up cash buffers and getting ahead on their mortgage repayments through COVID.
But Mr Hand has some concerns for how the bank’s customers will handle the next two years, particularly as ANZ is one of two big four banks that has higher rates of DTI (debt-to-income) in its lending, alongside NAB.
He explained that the two major banks have “stronger footholds” in commercial lending, with more business customers who also lodge their home loans through the bank, adding to their complexity and risk.
“This is one of my biggest worries, I mean, I’m a 33-year banker. I’ve been through four or five of cycles,” Mr Hand said.
“We’ve got customers now who for the last eight years have only known interest rates to go down. They’ve never received a letter saying your interest rate is going up.
“And there are people that have had mortgages for less than eight years of their life and whilst they know that the rate could change, they’ve not experienced it.”
While there have been serviceability buffers in place to show lenders they could afford mortgage rates, those customers have not yet needed to adjust their spending, he said, or to change their lifestyles.
He also acknowledged that household savings rates had surged, predicting that similar to the aftermath of the global financial crisis, there will be a “permanent shift” for customers to save more.
“Australia’s savings habits are better now than they were 10-15 years ago, for instance. We think customers are more financially astute than ever before,” Mr Hand said.
“But there has to be some pain, particularly as we’ve seen in the past, when rates do bounce back.”
Proportion of income needed for interest payments to hit 11-year peak
A new analysis from NAB economists has calculated that passing on the 225 basis points in rate hikes that markets have priced between now and September 2023 would lift housing interest payments as a share of household income to the highest level since September 2012.
According to the NAB modelling, the housing interest payment share would rise to 7.9 per cent of household income from its current 4.4 per cent. The average during 2009-21 was 7 per cent and prior to the pandemic, stood at 5.7 per cent.
The market has also priced for a further 25 basis point rise in 2024. NAB has projected that if that were to occur, the amount of income needed would rise to 8.3 per cent.
“While it is clear the household sector will be able to service a higher mortgage rate (especially given APRA’s minimum serviceability buffers), a rise in interest payments relative to income of 3.5 percentage points will have to be financed by a reduction in saving and/or lower consumption than otherwise unless the economy remains very strong and wages growth accelerates considerably,” the research note read.
Mr Hand similarly noted households will need to dedicate more of their salary towards debt than they’ve had before.
More consumers are expected to face pressure in the next 12-18 months, as costs rise alongside interest rates. There are also expected to be more cases of hardship.
“Lots of customers have paid down debt quite aggressively, as of late. So as a portfolio, you don’t get too concerned about the performance of the business because the way the portfolio behaves is pretty responsible,” Mr Hand said.
“But there will be individuals in that portfolio that will face a level of hardship coming out of this.”
Currently, ANZ has “all-time lows” for its levels of hardship, but Mr Hand has said that is likely to change.
“At the moment, we’re not seeing significant strain in our commercial book or our home loan book at all, in fact it’s scarily clean,” Mr Hand said.
“And we do wonder how many people are out there under pressure that have been propped up by government support, that we’ve just not seen flow through the system yet.
“But, it has to come. It’s as sure as any cycle we’ve ever been in.”