RBA Interest Rates: More financial pain for young households starting tomorrow
Interest rates are expected to be hiked for the tenth time this week, with younger and lower-income households hardest hit by one of the most aggressive interest rate tightening cycles as they surge to a 10-year high.
New analysis shows that the rate hikes will force the young and poor to cut spending as their disposable income shrinks amid skyrocketing rents, groceries, electricity bills and gasoline.
Yarra Capital Management economist Tim Toohey said he had found that discretionary money available to the bottom 20 percent of income earners will fall by about 24 percent this year, the report said. Australian Financial Review.
“The RBA’s already-realized rate hikes, not to mention the extra 50 basis points or more they suddenly seem to want to realize, are poised to cause massive financial pain to the lower-income and younger households, which is a abrupt halt in retail sales and possibly a sharp rise in the unemployment rate and a slew of delinquencies,” he said in a report.
While the focus was on the painful blow homeowners’ finances are taking, Mr Toohey said young people and lower-income households tend to have higher levels of debt.
“They are even more vulnerable to rising interest rates purely from a debt servicing perspective, let alone the fact that food, rent and utilities make up a large portion of their income and from the perspective that they have little else in the form of assets or financial resources. buffers,” he said.
While Australians saved a whopping $260bn during the pandemic, Mr Toohey said 35-44 year olds weren’t as smart and would be caught for continuing to “party” during the lockdowns.
“While everyone else was building up their savings, this group of aging millennials just kept spending,” he said.
“What they couldn’t spend on travel and restaurants, they more than made up for by buying a Peloton bike and a home gym, updating their TVs and furniture, hitting the basement, while revealing that they were the only cohort who thought buying a new car was a good idea during mandatory travel restrictions.
“As a result, 35- to 44-year-old households do not appear to have accumulated additional savings due to reduced consumption since the advent of Covid.”
Overall, the RBA could risk “burying” poorer and younger households after it raised interest rates from a record low of 0.1 percent to 3.35 percent in February, Toohey added.
A recent NAB report also found that low-income earners had the greatest financial hardship, with a quarter of those with incomes between $50,000 and $75,000 struggling to cover all of their bills.
But the housing market is also taking a hit with recent figures from the Australian Bureau of Statistics showing home loan values fell 5.3 percent in January and are now down a record 35 percent over the past 12 months.
The number of first-time home buyers taking out a loan has also fallen to its lowest level in five years and by 57.5 percent since peaking in early 2021.
It’s because new research showed that 54 per cent of Aussies feel that further interest rate hikes are not the solution to bring inflation back under control and that they are instead losing confidence in the government and the Reserve Bank of Australia to keep inflation under control. pressure to reduce the cost of living.
A majority also don’t believe that higher interest rates will help curb consumer spending, but people will continue to spend and create a significant burden, the Canstar survey found.
Canstar’s financial expert Steve Mickenbecker said homeowners were “justifiably nervous” about rising interest rates.
“A sense of urgency is added when you consider that about a third of all mortgage debt is made up of loans taken out in the past two years when real estate prices were high. Values are now being lowered and disappearing equity is under even more pressure,” he explained.
“Despite the record pace of rate hikes, inflation remains stubborn at 7.4 percent for the year to January 2023 and unemployment at a low 3.7 percent, giving the Reserve Bank little incentive to hold back further rate hikes.
“Now that the risks of a global recession look a little less threatening, the Reserve Bank will not be so constrained by concerns that it will overshoot interest rate hikes. But it will keep an eye out for any negative indicators in the medium term.
“A rate hike of 0.25 percentage point in March seems inevitable, with two more spot rate hikes by the end of the fiscal year.”
Another 0.25 percent increase in March means mortgage payments on a $500,000 loan will have increased from $2,103 in April last year to $3,154 per month.
As a result, borrowers will spend an additional $1,051 per month or $12,612 per year.
If the cash rate rises to a predicted 4.1 percent this year, the repayments on the same loan will increase by up to $3,320 per month, adding up to an additional $1,217 per month or $14,604 per year.
The survey also found that one in 10 mortgage holders and renters report having missed at least one payment or bill since rates started rising in April 2022, and another one in five reported being worried about missing out. of a payment in the near future. future.
“It is concerning that some borrowers and tenants are unable to pay their debts, rent and other bills so early after the first rate hike,” said Mr. Mickenbecker.
“Rate hikes used to slow spending have an uneven impact on consumers, with borrowers bearing most of the burden. The result is that 68 percent of mortgage holders experience financial stress.”
A shortage of rental properties is also causing renters to share the pain, with 65 percent of that group reporting feeling financially stressed, he added.
“Unfortunately there will be no early relief as a pause in rate hikes does not mean rate cuts are imminent,” he said.
“We are still five rate hikes 0.25 percentage points below the long-term average cash rate of 4.6 percent, and we should not count on interest rates returning to the lows of recent years.
“It’s time to close the shutters on a long streak of higher rates that, in reality, are only just returning to more normal levels.”
He added that refinancing from the average rate to the lowest rate in the market could offset six future increases of 0.25 percent.
“Borrowers are benefiting with the most recent data from the Australian Bureau of Statistics showing refinancing activity up 22.5 percent year-on-year. Another month or two of this trend and refinancers will be the largest segment in the home loan market,” he said.
“Fixed rates may also be back on the agenda for borrowers who can pay the principal payments today but fear future increases. Three years of repayment stability is now available for an average interest rate that is only 0.11 percent higher than the average variable.”
“Unfortunately, there will be borrowers who cannot find a way to cover their current repayments.
“If people find themselves in this situation, it is best to talk to their bank about relief measures and the long-term costs before considering temporary amortization breaks, switching to short-term interest-only repayments or extending their loan.”