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Home owners are ready for rate hikes: ANZ

Higher saving rates and accelerated pay rises will tide households over when the Reserve Bank bumps up the cash rate, according to economists at the big four bank.

A new report from ANZ Research senior economists Felicity Emmett and Adelaide Timbrell has outlined an updated forecast for house price growth and expectations around the mortgage market for the year ahead.

The new analysis has projected a higher rise in house prices for this year than previously expected (now 8 per cent for the capital city average yearly rise, versus 6 per cent before), before a decline of 6 per cent in 2023 (compared to the previous forecast of -3.5 per cent).

The economists believe the cash rate will climb to 2 per cent by the end of 2023, but they are not expecting a sharp fall in house prices as a result.

“Cashed up households, very low unemployment and a lift in immigration will all help to support the housing market through this period and limit the downturn in house prices,” the research note stated.

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At the same time, boosted savings and excess mortgage payments through the pandemic period are also expected to help Australians weather future interest rate rises.

“Higher household savings rates of 10-22 per cent since COVID began have provided many households with strong liquidity buffers coming into 2022,” the analysis from Ms Emmett and Ms Timbrell explained.

“Home owning households are more likely to have bigger liquid buffers, which can be drawn down if needed to service mortgages at higher interest rates.”

The Reserve Bank has also claimed home owners won’t be shaken by a climbing cash rate, after observing the majority of mortgage holders maintain higher loan repayments than required last year.

Research from RBA had also found that home owners had built up their cash buffers as a “side effect” of surging house prices.

ANZ’s economists have also pointed to wages growth. After years of the indicator staying largely flat, wages growth is anticipated to “accelerate” in 2022, offsetting mortgage rate increases for many households.

Further, despite a cash rate of 2 per cent being a fair way higher than the 2019 cash rate range of 0.75 per cent to 1.25 per cent, the ANZ team expects the average share of household income spent on interest payments next year will not return to prior levels.

The share of income used to service debt pre-COVID was steady at around 9 per cent, the report stated, before it dipped to a low of 5.2 per cent at the start of 2021 due to monetary easing.

“However, interest is only one part of the mortgage payment for most borrowers, particularly after earlier regulatory tightening of interest-only loans,” the report countered.

“Higher average new loan sizes poses a risk to some households if tightening materially raises mortgage payment costs.”

The average owner-occupier loan was around $550,000 in December, up 12 per cent year-on-year, and increasing by 21 per cent from December 2019.

The ANZ economists have also noted that debt tends to be more concentrated in higher-income households.

“Historical measures of the distribution of debt show that higher income earners tend to take on more debt relative to their income and have been the key drivers of increased debt-to-income ratios between 2003 and 2018,” the report stated.

“Higher income earners were also more likely to retain their jobs through COVID outbreaks and save more than they did before COVID.”

But, the rise in first home buyers may pose a risk to stability, the economists warned, noting there were 21 per cent more first home buyer loans in 2021 than the year before and 43 per cent more than annualised 2019 data.

The average new loan for rookie buyers in December was $481,000, up 11 per cent year-on-year.

“More first home owner loans, which tend to have higher LVR (loan-to-value ratios) and DTI (debt-to-income ratios) pose some risk as interest rates rise,” the report said.

“Recent first home buyers are also far less likely than other buyers to have strong liquidity buffers.”

APRA’s next steps

But, the team is keenly watching the housing finance market and APRA, in case the regulator decides to implement any further lending curbs.

After APRA’s initial first step in November, of lifting the interest rate serviceability buffer by 50 basis points from 2.5 per cent to 3 per cent, ANZ has noted that mortgage lending had bucked earlier downwards movements and rose in November and December.

However, higher serviceability buffers and higher interest rates will drive down home lending in the months ahead, the economists wrote.

They expect APRA will be “quite narrowly focussed on loans that are both high debt-to-income and high loan-to-valuation”, but if the market continues its resilience, then further and broader regulatory measures could become more likely.

[Related: Data confirms 2021 worst year for home loan affordability]

Home owners are ready for rate hikes: ANZ
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