Mortgage Arrears on Rise as Rates Hiked Again

The Reserve Bank of Australia has hiked interest rates to an 11-year high, citing an ongoing and stubborn inflation rate and an uncertain global economy.

In line with many economists’ expectations, the board of governors at its June meeting agreed to lift the cash rate target by 0.25 of a percentage point to 4.1 per cent.

It is the second rise in as many months, the 12th rise in 13 months, and takes interest rates to levels last seen early in 2012.

“Inflation in Australia has passed its peak, but at 7 per cent is still too high and it will be some time yet before it is back in the target range,” RBA governor Philip Lowe said in a statement after the meeting.

“This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe.”

And Lowe signalled there would be further rate rises if needed.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve,” he said.

The rise came as a new report found that the number of mortgage arrears nationally had risen across the first quarter of the year.

According to S&P Global Ratings’ RMBS Performance Watch: Australia report, rising interest rates and cost-of-living pressures were weighing on debt serviceability.

Prime mortgage arrears rose to 0.95 per cent in March 2023 from 0.76 per cent in December 2022, while non-conforming arrears hit 3.70 per cent in March, up from 3.20 per cent in December 2022.

“Refinancing conditions have tempered arrears by enabling many borrowers to switch to lower mortgage rates, reducing financial stress,” the report said.

“As interest rates continue to rise, refinancing conditions are becoming tougher for many borrowers, particularly those who are more highly leveraged.

“This is likely to add to arrears pressure because refinancing is a common way for borrowers to self-manage their way out of financial stress.”

The report also found the worst performing postcode for arrears was Katoomba in the NSW Blue Mountains with 5.62 per cent of mortgages in arrears, with Bonyrigg, also in NSW at 4.91 per cent and WA’s Forrestfield at 4.86 per cent behind that.

West Melbourne was Victoria’s worst at 4.17 per cent and Barkly Queensland’s with 4.01 per cent.

Finsure Group chief executive Simon Bednar said the country may need to brace for at least a couple more increases to the cash rate.

“Official rates look likely to hit 4.35 per cent during the second half of the year though the RBA may then keep rates on hold until Christmas,” he said.

CoreLogic’s head of research Eliza Owen pointed to the Fair Work Commission’s decision to increase award wages by 5.75 per cent and minimum wages by 8.6 per cent next financial year, which had increased market expectations of a lift in the cash rate.

“However, like many economic trends since the pandemic, the housing market has defied expectations,” Owen said.

“With continued strong demand from a surge in overseas migration, a slow return to pre-pandemic household size in the capital cities, and persistently low levels of advertised supply, the June rate hike may only serve to take some steam out of the recovery trend in housing values, rather than reverse recent gains.”

▲ Governor Lowe would not rule out further interest rate rises if needed.

The latest rate hike means a homeowner with a $500,000 mortgage will pay about $76 more each month.  That same homeowner on a 25-year mortgage will have seen repayments jump by around $1135 a month since May last year, when the RBA began lifting rates.

Lowe said the board was still seeking to keep the economy on an even keel, aiming for inflation to return to the “two to three per cent target range.”

However, the path to achieving “a soft landing” remained a narrow one. 

“Recent data indicate the upside risks to the inflation outlook have increased and the board has responded to this,” he said.

“While goods price inflation is slowing, services price inflation is still very high and is proving to be very persistent overseas. Unit labour costs are also rising briskly, with productivity growth remaining subdued.”

PropTrack  senior  economist  Eleanor Creagh said the Reserve Bank’s decision to lift the cash rate in May had not deterred the current home price rebound.

“After five consecutive months of national home price growth, stronger market conditions are more pervasive, and price rises are more widespread,” Creagh said.

“Strong demand relative to stock on market is seeing home prices lift, and offsetting the downward pressure from continued interest rate rises.” 

For Franklin Templeton’s director of fixed income Andrew Canobi, the RBA decision came as a surprise.

“As is often the case the RBA managed to upset market expectations yet again with a 12th hike in a row when the consensus was for a pause,” he said.

“The RBA seems to have taken fright from the minimum wage decision which is strange given it was arguably only marginally above expectations.

“The monthly CPI print which follows several monthly undershoots is volatile and not a particularly reliable indicator so ascribing a lot of weight to this recent number, as they appear to have done, is a little surprising.

“Aside from that all we can conclude is that the so-called narrow path is gone.”