As you are aware, the RBA has aggressively hiked rates by 3% p.a. over the past 8 months, so variable home loan rates are now more than 5% p.a. (and investment loans approaching 6% p.a.). Fixed rate borrowers have avoided these higher interest rates. However, a lot of fixed rates will begin expiring next year. As such, many borrowers are facing much higher (40%+) mortgage repayments next year.
These higher interest rates will have a huge impact on consumer discretionary spending and economic growth in 2023.
Many Australians have accumulated large liquidity buffers
Many Australians have enjoyed vastly improved cash flow during covid lockdowns as interest rates were at all-time lows (e.g., fixed rates were sub-2% p.a.) and people couldn’t spend money on their usual leisure activities. Australians did two things with their improved cash flow.
Firstly, they directed some of this cash flow towards improving liquidity buffers such as repaying home loans and/or accumulating cash in offset and savings accounts. According to RBA data, household savings (deposits) grew by over $500 billion (or 21%) since the beginning of the pandemic until June 2022. It is noteworthy that household liabilities have increased by only 12% over the same period.
Secondly, they spent more money on discretionary items. As the chart below from CBA illustrates, during lockdowns, Aussies would spend online and return instore once lockdowns were lifted – Covid didn’t adversely affect spending.
This chart covers the period from January 2020 until the end of November 2022. Total spending is still over 30% higher than it was at the beginning of 2020, although spending on things like retail and eating out has declined over recent months.
Discretionary spending will be the first to be cut
Faced with the decision of whether to eat out or pay the mortgage, of course virtually everyone will choose to meet their liabilities first.
The chart below illustrates the interest cost of mortgages assuming all mortgages were on variable interest rates (of course, many are fixed, as discussed above). The black dotted line is the projected total household interest bill at the current cash rate of 3.10% p.a. i.e., once all the rate hikes have been passed on. As you can see, once the cheap covid fixed rates expire, interest costs will be the same as they were pre-GFC in 2008 (in real terms). That is likely
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