‘Highly leveraged’: Australian mortgage squeeze tops the world amid rate cut uncertainty

Hotter-than-expected inflation data has likely pushed back the start date for interest rate cuts, a move that will keep pressure on mortgage holder budgets.

Hotter-than-expected inflation data has likely pushed back the start date for interest rate cuts, a move that will keep pressure on mortgage holder budgets. Photo: TND

Australians are enduring one of the toughest mortgage bill squeezes in the world, new analysis shows, as experts remain divided on whether interest rates relief is on the cards later this year.

Commonwealth Bank economists said on Friday that the 4.25 percentage points worth of cash rate hikes since May 2022 have had a stronger effect on Australian households than others.

“Australia sits at the top of the global table in terms of the strongest transmission of monetary policy,” they said.

The analysis probably isn’t surprising for millions of Australian households who have been hit by an increase of more than $1200 in monthly repayments typical on a $500,000, 25-year loan since 2022.

That has coincided with a huge spike in the number of families at risk of mortgage stress, while consumers more generally are pulling back on discretionary spending to focus on paying bills.

“Real household income has been hit much harder in Australia since early 2022 compared to other jurisdictions,” Commonwealth Bank economists said.

“Fiscal policy is also a lot tighter in Australia compared to many other jurisdictions. Australian households have handed over an increasing proportion of their income to the fiscal authorities.”

Source: Commonwealth Bank

Australians hit hardest

The reasons Australians have been squeezed harder than households in other nations such as the United States are numerous, but largely stem from a combination of two important factors.

Oxford Australia head of macroeconomic forecasting Sean Langcake said that Australia has relatively high levels of household debt compared to other nations, while the proliferation of variable interest rates on mortgages means Reserve Bank decisions have a rapid effect.

That’s different to the US, for example, where most home owners have long-term fixed deals, meaning they don’t need to fork over higher repayments when central bankers hike rates.

“On the whole interest rates don’t necessarily do more here than elsewhere in totality, but it is fair to say that the cashflow channel of monetary policy works faster here in a lot of ways,” Langcake said.

“We’re very, very highly leveraged.”

Rate cuts in 2024?

The huge impact of interest rates on household budgets is a key reason there’s so much focus on when the Reserve Bank may begin easing monetary policy amid easing inflation rates.

So far this year the headline Consumer Price Index (CPI) has fallen to 4.1 per cent much faster than the RBA had forecast, while underlying inflation (the measure watched by central bankers) has also eased.

The squeeze on households is actually a key reason for that, because consumption growth has plunged, meaning it has become more costly for many businesses to pass through further increases in their prices.

That has led economists to agree the next move for rates will be down.

However, RBA governor Michele Bullock has said the trajectory for rates is still highly uncertain, with the board looking for firm evidence inflation is headed back to the 2 to 3 per cent target band by the end of 2025.

Commonwealth Bank still believes rate cuts are likely to begin in September, with 1.5 percentage points worth of relief predicted to flow through by midway through 2025 (June).

But Langcake said central bankers will want to wait for two or three more inflation reports before starting rate cuts, which means households wouldn’t see relief till November or December at earliest.

And it could very well take until next year for the RBA to decide inflation would reach its target fast enough.

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