Savings buffers ‘exhausted’, Equifax warns

While Australia’s savings buffers have provided comfort for borrowers over the past year as the Reserve Bank of Australia (RBA) hiked up the cash rate by 300 bps, the savings cushion has been exhausted, according to general manager consumer at Equifax, James Forbes.

Indeed, each month from the beginning of the rate hike cycle in May 2022, the RBA has justified its move to increase the cash rate based on the high inflation rate, global turmoil, and Australia’s $200 billion savings buffer.

While the central bank has been conscious, not everyone has the same savings security and the cash rate lifted over eight consecutive months to 3.1 per cent.

The latest Australian Bureau of Statistics (ABS) household savings ratio for September quarter 2022 showed a decrease to 6.9 per cent from 8.3 per cent.

But Mr Forbes said buffers that were built up during the pandemic have been “pretty much exhausted now”.

“All those savings of people that people put away because they weren’t travelling or doing things they’ve been used up now,” Mr Forbes said.

“What we’re seeing is [borrowers] thinking about being more thoughtful and planning their budgets into next year.”

He said consumers are conscious of tightening their belts and thinking more carefully about budgeting.

ANZ Research for the beginning of 2023 showed a five-year low for the first week of January, down 4 per cent compared to the first week of 2022, despite prices rising close to 8 per cent in 2022.

“Weak ANZ-observed spending during the end of 2022 and the first week of 2023 suggests that cash rate hikes and inflationary pressures are having an impact on household spending appetite,” ANZ economist, Adelaide Timbrell, said.

Mr Forbes added that he expects discretionary spending will continue to ease particularly as the real impact of rising rates is yet to be felt.

“I suspect we might see New Year’s resolutions from Australian consumers ready to tighten their belts to sustain high cost of living and increased interest rates,” Mr Forbes said.

Earlier Equifax data found recent interest rate rises had seen seven in 10 (69 per cent) mortgage holders concerned about not being able to make their repayments or starting to take action about their mortgage and spending habits.

But he said mortgage arrears remained low.

“We haven’t seen the impacts of the pandemic or what’s happening in the market and the economy more broadly translate into any sort of arrears,” Mr Forbes said.

While overall mortgage arrears (30+ days past due) are still sitting below pre-pandemic levels (at 0.5 per cent), earlier Equifax data did show an increase of 17 per cent in the number of accounts requiring assistance over the last six months.

In addition, the Reserve Bank of Australia (RBA) estimated that around 23 per cent of all Australian home loans — worth almost $500 billion — are fixed rate and will switch to variable rate by the end of 2023.

“Borrowers with fixed-rate loans that are due to expire by the end of 2023 would experience a median increase of around $650 (or 45 per cent) in their monthly repayments,” deputy governor, Michelle Bullock, had warned.

“This is slightly more than the rise in payments that variable-rate borrowers would experience over this time.”

As such, housing loan arrears rates are likely to increase from low levels in the period ahead, according to the central bank.

As those fixed-rate loans expire, Mr Forbes added refinances will continue off the back of record highs.

“The interesting thing will be whether investors see that prices are now becoming attractive, interest rates have stabilised, and will see more investors coming back into market to take up new loans,” Mr Forbes said.

[Related: Restraint is in order: Treasurer]