SYDNEY – Soaring inflation is leading to sharp interest rate rises around the world, but the consequences could be much worse for Australia because of its staggeringly high levels of household debt.
In each month since May, Australia’s central bank, the Reserve Bank, has lifted interest rates, marking the fastest rise in almost 30 years. Since May, rates have increased from 0.1 per cent to 3.1 per cent. The bank does not meet in January, but is expected to lift rates to 3.35 per cent at its next meeting in February 2023.
But these increases are set to deliver a double-edged shock to Australia’s economy. The first problem is that households are heavily indebted, owing to soaring property prices. The second problem is that borrowers in Australia – unlike in many other countries – tend to have variable mortgages that increase as interest rates go up.
Soaring property prices have lifted Australian household debt to 117 per cent of gross domestic product (GDP), the second-highest in the world behind Switzerland, according to the latest figures from the Bank for International Settlements. In contrast, Singapore’s household debt to GDP is 56 per cent.
In Sydney, the most populous city and the most expensive housing market in Australia, average home prices are about A$1.2 million (S$1.1 million), up from A$585,000 in 2012. Prices remain spectacularly high, though interest rate increases have sparked average falls of more than 11 per cent in the past year.
But about 60 per cent of Australians have variable-rate mortgages, meaning that many have faced massive increases in their monthly repayments as interest rates rise. In Sydney, for instance, where the average mortgage is about A$750,000, monthly loan repayments have increased by A$1,251 since May.
The rest of the borrowers are mostly on short-term loans that will expire over the coming months. Many of them took advantage of record-low interest rates of 0.1 per cent to refinance their loans for one, two or three years, but will soon face big bumps in their repayments as their loans expire. Many households will need to somehow find additional income or savings, or may need to sell their home.
A couple in Sydney, Mr Aaron Doull and his wife Saori, recently described their looming challenge as their mortgage transfers to a variable rate in 2023. They will need to pay about A$1,500 extra a month.
“We don’t know what the future holds, or where we could be in one or two years’ time,” Mr Doull told ABC News on Saturday.
Analysts believe the worst month for households will be May 2023, when A$44 billion worth of loans convert from fixed rates to the higher variable rate. According to financial services firm Barrenjoey, about A$30 billion to A$40 billion in loans will switch to the variable rate each month from June 2023 until the end of the year.
These looming repayment increases have been described by commentators in Australia as a “ticking time bomb” and a “cliff” that could plunge the economy into recession. And the vulnerability of Australians to interest rate rises is making it harder for the Reserve Bank to combat inflation by lifting rates.
“Unquestionably, a lot of Australian households are going to feel a reduction in free cash flow for discretionary spending,” Barrenjoey chief economist Jo Masters told The Australian newspaper.
“It’s clearly one of the key things they (the Reserve Bank) are watching, as there’s a lot of uncertainty around it,” she said.
But there are still hopes that Australia’s economy can survive the ticking time bomb. The unemployment rate is 3.4 per cent – the lowest in almost 50 years – and some residents may find that the tight job market makes it possible to find extra work.
Still, as long as annual inflation remains high – it is 6.9 per cent, well above the central bank’s target of 3 per cent – there is little hope of any relief to the serious hip-pocket pain facing Australian households.
