Majority of households able to withstand higher home loan rates: RBA

Pandemic savings and ballooning asset prices have left Australian households in good shape to cope with rapidly rising interest rates, according to Reserve Bank of Australia deputy governor Michele Bullock.

In a speech to the Economic Society of Australia on Tuesday, Bullock said that the RBA was monitoring for risks among the one-third of Australian households currently paying off a home loan.  

"The sector as a whole has large liquidity buffers, most households have substantial equity in their housing assets, and lending standards in recent years have been more prudent and have built in larger buffers for interest rate increases," she said. 

"Much of the debt is held by high-income households that have the ability to service their debt and many borrowers are already making repayments well above what is required."

While Australia’s household debt-to-income ratio is high at 150 per cent, Bullock notes that most of the run-up occurred throughout the 1990s and the first half of the 2000s, and since then has remained fairly steady.

The large amount of savings households accumulated over the last few years — totalling $260 billion since the onset of the pandemic — will also help cushion the blow of higher mortgage repayments.

As for the expected dip in property prices, Bullock points out that borrowers have benefited from record growth in recent years, and while some of those gains might be undone in the near future, it won’t be enough to pose a risk to the system.

"Data suggests that a decline in housing prices of 10 per cent would raise the share of balances in negative equity to 0.4 per cent, which is still much lower than its peak of 3¼ per cent in 2019," she said.

"Even a fall of 20 per cent in housing prices would only increase the share of balances in negative equity to 2.5 per cent."

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Throughout the latest housing boom, the RBA maintained that there was little evidence lending standards had deteriorated. Indeed, banks have long been testing borrowers on their ability to withstand higher rates at APRA’s urging.

In October 2021, APRA recommended that banks add a margin of at least 3 per cent to their mortgage rates. Higher serviceability requirements, while limiting the amount many can borrow, have left households with spare servicing capacity.

But borrowers coming off fixed rate loans may be in for a shock, with the RBA estimating that the variable rates they roll over to could see them paying at least 40 per cent more each year.

"But given the very low interest payments and the broad-based increase in household saving rates, it is likely that many of these borrowers will have accumulated savings outside their mortgages ahead of any potential increase in repayments,” Bullock said.

"The accumulated stock of these savings could help to ease the transition to higher mortgage payments for many borrowers, allowing them to sustain higher levels of consumption than otherwise."

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