Chart of the Month - October 2023

Increasing financial stress on mortgage payers

While Australia is not in recession, it sure feels like it for many households. The tube of toothpaste is being squeezed from both ends with rising living costs at one end and rising mortgage payments at the other end. This month’s chart shows that the percentage of variable-rate owner-occupiers whose cost of living now exceeds their income has more than quadrupled between April 2022 and July 2023 for both the baseline and broad measure.

HEM stands for Household Expense Measure. The Baseline HEM includes essential expenses such as food, utilities, and transport. The Broader HEM includes other items that cannot easily be changed in the short term such as school fees and medical insurance. Neither include housing costs: mortgage or rent.

With the cost of living squeezing household expenses, more Australians are finding it harder to meet their mortgage payments. The September Roy Morgan survey on mortgage stress found that 30.3% of mortgage holders are “At Risk” i.e. struggling to meet mortgage payments while 20.5% or over million Australians are ‘Extremely At Risk” i.e. struggling to pay even the interest part of their mortgage payments (see chart below).

The number of Australians under mortgage stress is set to swell further given that the RBA may still yet raise rates further (with inflation increasing 1.2% in the September quarter) and because over 40% of variable-rate owner occupiers have less than 3 months of mortgage buffers after accounting for the cost of living (see chart below). They don’t have much room to breathe.

Thankfully, many Australians in or near mortgage stress don’t have to worry about losing their job, at this stage, with unemployment still remarkably low at 3.6% for September. But if unemployment increased, Australia could quickly find itself in a consumer-led recession with worries in the housing market.

Australia is leading the world in terms of mortgage stress

While Australia is not alone in terms of rising interest rates and mortgage stress, Australians are feeling the pinch more than any other households around the world. A recent report by the IMF found that Australians have the highest mortgage debt to income ratios of selected advanced economies (see chart below).

Part of the reason that Australian households are suffering more than households in other countries is that house prices are still quite high, interest rate increases in Australia since Q4 2022 is second only to the US (see the blue dot in the chart above), and because variable-rate mortgages make up the majority of Australian mortgages. (see vertical axis in chart below).

The Australian economy may be resilient and the financial sector sound but Australian households are finding it tougher than households in many other countries.

What does this mean for Private Debt in Australia?

The Reserve Bank will of course take into account the predicament of Australian households in deciding what to do next with interest rates. It thus seems likely that interest rates will not go up much further. And the level of unemployment will likely determine how long they will stay high. Of course, this depends on inflation behaving itself. Even so, the RBA does not have the space to move as much as it did at the start of the cycle.

This means that the floating rates for private debt will soon reach their peak in the current cycle, which should attract investors who are considering investing in private debt. Given the resilience of the Australian economy, risks remain relatively low for now, but this could change quickly if unemployment increases.